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December 24, 2014
Secretary Julián Castro
U.S. Department of Housing and Urban Development
451 7th
Street, SW
Washington, DC 20410
Re: Shared Equity Homeownership and HUD/FHA
Dear Secretary Castro:
The National Community Land Trust Network (“NCLTN”) is a national nonprofit membership
organization of community land trusts (“CLTs”) and other permanently affordable housing
organizations. NCLTN was incorporated in 2006, and, together with our members, we promote
strategic community development and permanently affordable housing benefiting low- and moderate-
income families through the practice of shared equity homeownership.
NCLTN provides support and leadership to over one hundred sixty organizations, including those
organizations that offer homeownership programs with lasting affordability in CLTs, Community
Development Corporations, Community Development Financial Institutions, Habitat for Humanity
affiliates, government-based inclusionary zoning programs, and deed-restricted programs. Together,
our members provide over 13,000 units of affordable homeownership units and over 20,000
affordable rental units.
While NCLTN, our members, and the Federal Housing Administration (“FHA”) seek to increase
homeownership opportunities for low- and moderate-income homeowners, our members have found
that homeowners participating in shared equity homeownership programs often cannot access FHA
programs.
We are writing to you today to request several regulatory changes that may facilitate homeowners’
access to FHA programs and, at the same time, advance your stated goal of reaching underserved
potential borrowers. We have also included proposed changes to the current Mortgagee Letter (94-2)
(the “Mortgage Letter”) that we believe will streamline the approval process for affordable housing
program participants.
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NCLTN acknowledges that HUD program staff has spent considerable time discussing many of the
issues raised in this letter. However, with no resolution on these issues to date, we are bringing these
matters your to attention at this time.
Background on Shared Equity Homeownership Programs:
Shared equity homeownership (“SEH”) is an umbrella term for programs that provide
homeownership opportunities with lasting affordability, sometimes referred to as “permanently
affordable homeownership programs” or homeownership programs with “lasting affordability”
or “long-term affordability.” (For the purposes of this letter, we will refer generally to shared
equity homeownership programs as “SEH Programs”). As described in greater detail in
Exhibit A, SEH Programs generally make a one-time investment to create homeownership
opportunities that are affordable for purchase by a low- or moderate-income homebuyer. In
return for owning a home at an affordable cost, the homeowners agree to certain restrictions
including limitations on returns upon resale or limitations on conveyances of the property. In
effect, homeowners “share” some of the proceeds from resale to pay the opportunity forward to
the next low- or moderate-income homebuyer.
Successes of SEH Programs:
Conducted by Cornerstone Partnership in 2014, the “Social Impact Report” is the most recent
national longitudinal study of 53 SEH Programs representing 3,768 homes. It found that SEH
Programs:
1) Increase access to homeownership. The average household income at the time of
purchase was 65% of the area median income, and 82% were first-time homebuyers. On
average, the homes were sold 25% below their fair market value in order to make home
purchase affordable.
2) Improve the likelihood that homeownership will be sustained. Over 93% of
households remained homeowners for at least five years. This starkly contrasts a nation-
wide longitudinal study conducted by Reid (2005), which found that less than 50% of
first-time lower-income and minority owners maintained homeownership for five years.
3) Reduce the likelihood of foreclosures. Shared equity homeowners—all of whom were
lower-income—were ten times less likely to be in foreclosure than homeowners in the
conventional market across all incomes. These results are consistent with findings from
other national studies conducted in 2009 – 2011.
4) Build wealth for homeowners. The annual rate of return on these households’
investments in homeownership was 7.97%. If they had taken the same amount of money
and invested it in the S&P 500, their annual rate of return would have only been 1.06%.
Hence, homeowners participating in shared equity homeownership build wealth.
Approximately, 62% of households went on to buy a home in the conventional market.
5) Preserve the public’s investment by keeping homes affordable resale after resale.
Delivering on the model’s promises, these programs retained the affordability of the
homes to serve the same income level resale after resale.
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FHA Regulatory Roadblocks:
Unfortunately, homeowners participating in SEH Programs have experienced difficulties in
accessing FHA programs. The below discussion details two of the most onerous regulatory
roadblocks that have prevented such access. This part of the letter requests various regulatory
changes that FHA/HUD can make to bring FHA and SEH Programs together to assist in creating
more low- and moderate-income homeownership opportunities.
I. Legal Restrictions on Conveyance
HUD regulations at 24 CFR 203.41(c) permit legal restrictions on conveyance if the restrictions
are part of a governmental or nonprofit program and if the restrictions on conveyance terminate
upon foreclosure or deed-in-lieu of foreclosure. Notwithstanding this exception, pursuant to 24
CFR 203.41(d), HUD/FHA will not insure a mortgage on property that is subject to a legal
restriction on conveyance (even if the restriction is a part of a nonprofit or governmental
program) if a violation of the restriction would be grounds for (1) accelerating the insured
mortgage, (2) voiding a conveyance of the mortgagor’s interest in the property, (3) terminating
the mortgagor’s interest in the property, or (4) subjecting the mortgagor to contractual liability
other than requiring repayment of assistance.
These regulations severely limit the effectiveness of the legal instruments SEH Programs use to
maintain affordability by restricting the remedies such programs may use to enforce restrictions
on conveyance. As described in more detail in Exhibit A, SEH Programs rely on legal
restrictions to protect the affordability of homes and promote the success of homeowners. While
the regulations permit certain restrictions, such as resale, occupancy, and purchaser-income, the
limitations on remedies effectively renders such restrictions moot.
Furthermore, the regulations (24 CFR 203.41(d)(3)) provide that a SEH Program’s legal
documents may contain a purchase option or right of first refusal whenever a homeowner choses
to sell his/her property, whether or not such sale is as a result of default or foreclosure.
However, the language of 203.41(d) discussed above limits a SEH Program’s opportunity to
actually enforce such purchase option or right of first refusal if the homeowner fails to honor
them. Without adequate remedies to enforce legal restrictions on conveyance, SEH Programs
are unable to ensure that homes will continue to serve low- or moderate-income households and
remain affordable over many sales.
NCLTN seeks a regulatory change that will remove these limitations on remedies for eligible
nonprofit and governmental programs.
Additionally, the regulations require that all legal restrictions on conveyance terminate upon
foreclosure or deed-in-lieu of foreclosure. Often in foreclosure situations, SEH Programs seek to
cure the default and find another qualified family that could purchase the home. This process
can take some time, and may not be complete before the lender takes possession of the leasehold
estate.
While we understand why HUD would require that restrictions on conveyance terminate upon
foreclosure, NCLTN requests that HUD amend the regulations to permit SEH Program’s
purchase options to survive foreclosure for a limited period of time. This is the practice of
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Fannie Mae, and NCLTN members have found that the extended cure period prevents the loss of
affordable homeownership units (while also limiting unwanted lender inventory).
Requested Regulatory Change:
To address the issues raised above, NCLTN requests that HUD revise subsections (c) and (d) of
24 CFR 203.41 as follows:
(c) Exception for eligible governmental or nonprofit programs. Legal restrictions on
conveyance are acceptable if:
(1) The restrictions are part of an eligible governmental or nonprofit program and
are permitted by paragraph (d) of this section; and
(2) Subject to any extended redemption period permitted by paragraph (d)(4) of
this section, Tthe restrictions will automatically terminate if title to the mortgaged
property is transferred by foreclosure or deed-in-lieu of foreclosure, or if the mortgage is
assigned to the Secretary.
(d) Exception for eligible governmental or nonprofit programs—specific policies. For
purposes of paragraph (c) of this section, restrictions of the following types are permitted for
eligible governmental or nonprofit programs, provided that a violation of legal restrictions on
conveyance may not be grounds for acceleration of the insured mortgaged or for an increase in
the interest rate, or for voiding a conveyance of the mortgagor's interest in the property,
terminating the mortgagor's interest in the property, or subjecting the mortgagor to contractual
liability other than requiring repayment (at a reasonable rate of interest) of assistance provided to
make the property affordable as low- or moderate-income housing:
[….]
(2) Legal restrictions on conveyance may extend beyond the term of the
mortgage, subject to paragraph (c)(2) of this section and any limitations applicable in the
jurisdiction.
(3) Except as otherwise required by the HOME and HOPE programs, rights under
an option to purchase, pre-emptive rights to purchase or rights of first refusal shall only
be held by a governmental body or eligible nonprofit organization (or their assignee who
will purchase and occupy the property), or another individual or organization approved
by the Secretary, and shall be exercised by them or their assignee (or an assignee who
will purchase and occupy the property) only within a reasonable time after the event
permitting exercise of the rights occurs, not to exceed a period of time determined by the
Secretary. The Secretary may approve another individual or organization under the
preceding sentence even if the restriction is not part of an eligible governmental or
nonprofit program.
(4) Rights under an option to purchase, pre-emptive right to purchase or rights of
first refusal permitted in paragraph (d)(3) of this section may survive foreclosure or deed-
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in-lieu of foreclosure for a reasonable redemption period, which redemption period shall
not exceed a period of time determined by the Secretary.1
[….]
(5) The mortgagor may be required to continue to be an owner-occupant.
(6) The mortgagor may be limited in his or her ability to choose a purchaser for
the property, but only to the extent necessary to ensure that the property is preserved as
low- or moderate-income housing.
(7) The mortgagor for a rehabilitation loan insured under § 203.50 of this part
may hold title subject to a condition subsequent, provided that the holder of the right of
entry for condition broken also executes the mortgage, and that the right is exercisable
only for failure by the mortgagor to complete the rehabilitation or occupy the property as
agreed by the mortgagor.
(8) Property may be subject to a legal restriction on conveyance to the extent
approved in writing by an authorized representative of the Secretary prior to September
10, 1993.
NCLTN would be happy to discuss these requested changes in more detail.
II. Resale Formulas/Fair Return
In addition to limiting legal restrictions of conveyances, HUD regulations currently limit SEH
Programs’ right to use the most effective tool to maintain affordable homeownership
opportunities: resale restrictions. As briefly discussed above, resale restrictions are an integral
part of SEH Program activities. Currently, HUD regulations generally permit restrictions on the
sales price of properties purchased under a SEH Program.2 However, the regulations go on to
prescribe that such restrictions are acceptable as long as the owner “is not prohibited from
recovering:
(i) The sum of the mortgagor's original purchase price, the mortgagor's reasonable costs
of sale, the reasonable costs of improvements made by the mortgagor, and any negative
amortization on a graduated payment mortgage insured under § 203.45 of this part; and
(ii) A reasonable share, as determined by the Secretary, of the appreciation in value
which shall be the sales price reduced by the sum determined under paragraph (d)(1)(i) of
this section.”
1 The concept of a reasonable redemption period comes from the Fannie Mae Seller Guide Section B5-5.1-04 and
B5-5.0-03.
2 “…the mortgagor may be prohibited from selling the property at a price greater than the price permitted under the
program, or the mortgagor may be required to pay a portion of the sales proceeds to a governmental body or an
eligible nonprofit organized, as long as the mortgagor is not prohibited from recovering:…” 24 CFR 203.41(d)(1).
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The regulations also note that the purchase price under a right of first refusal/purchase option
held by a nonprofit may not be less than the “sum of the mortgagor's original purchase price, the
mortgagor's reasonable costs of sale, the reasonable costs of improvements made by seller, and a
reasonable share, as determined by the Secretary, of the appreciation in value.”3
NCLTN members have found the resale formula provided in the regulations to be extremely
problematic. First, the formula seems to operate divorced from market realities: it is possible
that the value of the property is substantially lower than the original purchase price. Second,
depending upon market conditions, it cannot be guaranteed that the costs of sale will be
recuperated by the seller. Furthermore, the resale formula fails to reflect market realities that
homeowners rarely recover the full costs of capital improvements upon the sale of their property,
as the value of such improvements often does not equal the costs, since the value of such
improvements may decline over time.
Even more generally, HUD’s recitation of a specific resale formula that includes a “reasonable
share of appreciation” fails to recognize that there are many types of resale formulas that SEH
Programs use. For example, some SEH Programs use an index-based formula, whereby the
resale price is indexed to change in connection with the area median income, cost of living, or
some other metric. Other SEH Programs use a fixed-percentage formula, whereby the resale
price is determined by adding an annual percentage increase to the original purchase price.
There are other resale formulas that have proven effective in providing a fair return to
homeowners, while also protecting the public investment made by the SEH program to preserve
affordability throughout the resale process. While we know that HUD is inherently concerned
with protecting homeowners, SEH Programs use these various resale restrictions in order to help
low- and moderate-income families gain wealth from accessing and sustaining homeownership
while concurrently protecting affordability of homes to help more families in the future.
Therefore, we believe that requiring resale restrictions that stipulate a nationwide definition for
fair returns are not necessary, productive, or realistic.
The regulatory restriction requiring that the first refusal/purchase options held by nonprofits may
not be less than original purchase price, reasonable costs of sale, reasonable costs of
improvements made by seller, and a reasonable share of the appreciation in value, is also
extremely problematic. As discussed above, rights of first refusal/purchase options are
frequently used by SEH Programs to maintain unit affordability over resales. This purchase
price formula does not reflect market realities that the value of a property may drop significantly
below the original purchase price or not rise sufficiently to cover the costs of improvements and
costs of sale. In such a circumstance, rather than excising its first refusal right, a SEH provider
would be forced to let a property proceed to foreclosure, where it would attempt to buy back the
property at the a more reasonable, fair market value price. This is not in the best interest of the
mortgage lender, FHA, or the mortgagor.
Requested Regulatory Change:
To address the issues raised above, NCLTN requests that HUD remove all references to a resale
formula in section (d) of 24 CFR 203 as follows:
3 24 CFR 203.41(d)(4).
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(d) Exception for eligible governmental or nonprofit programs—specific policies. For
purposes of paragraph (c) of this section, restrictions of the following types are permitted
for eligible governmental or nonprofit programs, provided that a violation of legal
restrictions on conveyance may not be grounds for acceleration of the insured mortgaged
or for an increase in the interest rate, or for voiding a conveyance of the mortgagor's
interest in the property, terminating the mortgagor's interest in the property, or subjecting
the mortgagor to contractual liability other than requiring repayment (at a reasonable rate
of interest) of assistance provided to make the property affordable as low- or moderate-
income housing:
(1) Except as otherwise provided in the HOME Investment Partnerships (HOME) and the
Homeownership and Opportunity for People Everywhere (HOPE) programs, the mortgagor may
be prohibited from selling the property at a price greater than the price permitted under the
program, or the mortgagor may be required to pay a portion of the sales proceeds to a
governmental body or an eligible nonprofit organization, as long as the mortgagor is not
prohibited from recovering:
(i) The sum of the mortgagor's original purchase price, the mortgagor's reasonable costs of sale,
the reasonable costs of improvements made by the mortgagor, and any negative amortization on
a graduated payment mortgage insured under § 203.45 of this part; and
(ii) A reasonable share, as determined by the Secretary, of the appreciation in value which shall
be the sales price reduced by the sum determined under paragraph (d)(1)(i) of this section.
[….]
(4) In addition to the restrictions stated in paragraph (d)(3) of this section, the purchase price
under an option may not be less than the sum of the mortgagor's original purchase price, the
mortgagor's reasonable costs of sale, the reasonable costs of improvements made by seller, and a
reasonable share, as determined by the Secretary, of the appreciation in value.
To see a full cumulative mark up of our requested regulatory changes to 24 CFR 203.401(c) and
(d), please see Exhibit B.
FHA Programmatic Roadblocks:
While NCLTN would like to pursue the regulatory changes requested above, NCLTN believes
SEH Program participants and HUD can work together within the current regulatory framework
to help homeowners participating in SEH Programs access FHA programs now. One way to
achieve this goal is to resolve any confusion among HUD Field Offices and HUD Headquarters
on when and how homeowners participating in SEH Programs may be eligible for FHA
insurance. In other words, NCLTN is requesting that HUD clarify when legal restrictions on
conveyance used by SEH Programs are acceptable in order to streamline the FHA approval
process.
To effectuate this clarification, NCLTN has drafted proposed changes to the current Mortgagee
Letter (94-2) to clarify issues that routinely serve as roadblocks for our members assisting
homeowners in the FHA process. We believe these proposed change are permitted by the
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current HUD regulations, and generally our changes just seek to clarify rights already granted to
SEH Program in 24 CFR 203.41. For ease of review, attached at Exhibit C is an annotated copy
of our suggested changes to Section II and Section III of the Mortgagee Letter. As with our
requested regulatory changes, we hope to have the opportunity to discuss our proposed
Mortgagee Letter changes in more depth.
Conclusion
We appreciate your consideration of the foregoing and look forward to working with you and
your staff in achieving resolution, so that the valuable tool of SEH can continue to create
successful homeownership opportunities for those who may not otherwise have access.
Sincerely,
Melora Hiller
Executive Director
National Community Land Trust Network
Cc: Acting Assistant Secretary Biniam T. Gebre
General Counsel, Helen R. Kanovsky
Emily Thaden, NCLTN
George L. Weidenfeller, Reno & Cavanaugh, PLLC
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Exhibit A
The majority of shared equity homeownership programs (“SEH Programs”) are resale-restricted
programs, meaning that they restrict the maximum price for which the home may be resold and
restrict who may purchase the property to income-eligible households. Hence, low- or moderate-
income buyers purchase and resell homes at prices below fair market value in order to keep the
home affordable. Resale restrictions are set forth in a legal contract between the homeowner and
the SEH Program. Some SEH Programs do not restrict the price for which the home may be
sold, but instead, these types of programs allow homeowners to sell homes at fair market value,
but use legal documents to stipulate how a sale or transfer may take place to ensure the homes
remain affordable for the next low- or moderate-income buyer (such as, stipulating that the seller
receives only a portion of appreciation). Examples of these programs include limited equity
housing cooperatives, resident-owned communities, community land trusts (“CLT”), certain
types of deed-restricted programs, and shared appreciation loan (“SAL”) programs. However,
for the purposes of addressing access to FHA-insurance for single-family mortgages, only the
following types of SEH Programs are relevant: CLT, deed-restricted programs, and SAL
programs. Consequently, only these types of programs are discussed below.
Aside from resale restrictions, SEH Programs also tend to have primary residency requirements,
occasional fees owed to the SEH Program (such as ground lease payments), and/or financing
approval requirements. These requirements and restrictions all help create and maintain
affordable homeownership opportunities for low- and moderate-income persons.
A variety of legal mechanisms are used to create SEH opportunities:
1. Deed covenants: Deed covenants may be designed specifically to create shared equity
homeownership opportunities. For example, the vast majority of inclusionary housing
programs utilize deed covenants to resale-restrict inclusionary homeownership units.
Notably, deed covenants used by SEH Programs sometimes only have 30-year terms. In
these instances, affordability of the homes is preserved by ensuring the SEH Program has
the preemptive option to purchase the home and may transfer this option to an eligible
buyer. Additionally, deed-restricted programs used by SEH Programs will also have
every new homeowner sign a new deed covenant with a new term. That way, the
affordable home is preserved and serves subsequent low- or moderate-income
homebuyers.
2. Ground Leases: The vast majority of CLTs utilize renewable, 99-year ground leases to
create shared equity homeownership opportunities. The homeowner leases the land from
the CLT for a nominal monthly ground lease fee while s/he owns and obtains mortgage
financing for the improvements. Notably, sometimes the CLT provides additional
subsidy beyond the fair market value of the land in order to make the home affordable for
a low- or moderate-income household. Even though ground lease durations are longer
than most deed covenants, CLTs usually have preemptive option to purchase the home
(or to transfer this option to an eligible buyer), and they also have every new homeowner
sign a ground lease with a new term.
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3. Shared appreciation loans: Second mortgage loans that share appreciation may be used
to create shared equity homeownership opportunities (although few programs currently
utilize this legal mechanism). These types of SAL programs should not be confused with
other “shared appreciation loans” that are available in the private market, which are
profit-driven first mortgage loan products. SEH Programs that utilize SALs design them
as a way to make homeownership significantly more affordable to low- or moderate-
income buyers and to recoup the second mortgage and some portion of the appreciation
so that a subsequent SAL can be made to a subsequent low- or moderate-income
purchaser of a property. Typically, the second mortgage loan has a 30-year term with 0%
interest and is due upon sale. The nonprofit or public entity typically records a deed
covenant stipulating the program’s requirements and resale requirement along with loan
documents. Typically, the SAL program retains the preemptive option to purchase the
home (or to transfer this option to an eligible buyer) in order to keep the same home
affordable to next buyer.
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Exhibit B
Comprehensive proposed changes to 24 CFR 203.401(c) and (d)
(c) Exception for eligible governmental or nonprofit programs. Legal restrictions on
conveyance are acceptable if:
(1) The restrictions are part of an eligible governmental or nonprofit program and
are permitted by paragraph (d) of this section; and
(2) Subject to any extended redemption period permitted by paragraph (d)(4) of
this section, T the restrictions will automatically terminate if title to the mortgaged
property is transferred by foreclosure or deed-in-lieu of foreclosure, or if the mortgage is
assigned to the Secretary.
(d) Exception for eligible governmental or nonprofit programs—specific policies. For
purposes of paragraph (c) of this section, restrictions of the following types are permitted for
eligible governmental or nonprofit programs, provided that a violation of legal restrictions on
conveyance may not be grounds for acceleration of the insured mortgaged or for an increase in
the interest rate, or for voiding a conveyance of the mortgagor's interest in the property,
terminating the mortgagor's interest in the property, or subjecting the mortgagor to contractual
liability other than requiring repayment (at a reasonable rate of interest) of assistance provided to
make the property affordable as low- or moderate-income housing: …
(1) Except as otherwise provided in the HOME Investment Partnerships (HOME)
and the Homeownership and Opportunity for People Everywhere (HOPE) programs, the
mortgagor may be prohibited from selling the property at a price greater than the price
permitted under the program, or the mortgagor may be required to pay a portion of the
sales proceeds to a governmental body or an eligible nonprofit organization, as long as
the mortgagor is not prohibited from recovering:
(i) The sum of the mortgagor's original purchase price, the mortgagor's reasonable costs of sale,
the reasonable costs of improvements made by the mortgagor, and any negative amortization on
a graduated payment mortgage insured under § 203.45 of this part; and
(ii) A reasonable share, as determined by the Secretary, of the appreciation in value which shall
be the sales price reduced by the sum determined under paragraph (d)(1)(i) of this section.
(2) Legal restrictions on conveyance may extend beyond the term of the
mortgage, subject to paragraph (c)(2) of this section and any limitations applicable in the
jurisdiction.
(3) Except as otherwise required by the HOME and HOPE programs, rights under
an option to purchase, pre-emptive rights to purchase or rights of first refusal shall only
be held by a governmental body or eligible nonprofit organization (or their assignee who
will purchase and occupy the property), or another individual or organization approved
by the Secretary, and shall be exercised by them or their assignee (or an assignee who
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will purchase and occupy the property) only within a reasonable time after the event
permitting exercise of the rights occurs, not to exceed a period of time determined by the
Secretary. The Secretary may approve another individual or organization under the
preceding sentence even if the restriction is not part of an eligible governmental or
nonprofit program.
(4) Rights under an option to purchase, pre-emptive right to purchase or rights of
first refusal permitted in paragraph (d)(3) of this section may survive foreclosure or deed-
in-lieu of foreclosure for a reasonable redemption period, which redemption period shall
not exceed a period of time determined by the Secretary.4
(4) In addition to the restrictions stated in paragraph (d)(3) of this section, the purchase price
under an option may not be less than the sum of the mortgagor's original purchase price, the
mortgagor's reasonable costs of sale, the reasonable costs of improvements made by seller, and a
reasonable share, as determined by the Secretary, of the appreciation in value.
(5) The mortgagor may be required to continue to be an owner-occupant.
(6) The mortgagor may be limited in his or her ability to choose a purchaser for
the property, but only to the extent necessary to ensure that the property is preserved as
low- or moderate-income housing.
(7) The mortgagor for a rehabilitation loan insured under § 203.50 of this part
may hold title subject to a condition subsequent, provided that the holder of the right of
entry for condition broken also executes the mortgage, and that the right is exercisable
only for failure by the mortgagor to complete the rehabilitation or occupy the property as
agreed by the mortgagor.
(8) Property may be subject to a legal restriction on conveyance to the extent
approved in writing by an authorized representative of the Secretary prior to September
10, 1993.
4 The concept of a “reasonable redemption period” comes from the Fannie Mae Seller Guide Section B5-5.1-04 and
B5-5.0-03, which NCLTN members have found works well for SEH Program purposes.
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Exhibit C
Proposed draft Mortgagee Letter
Showing changes from relevant sections of Mortgagee 94-2
TO: ALL APPROVED MORTGAGEES
SPECIAL ATTENTION: Nonprofit Agencies with Affordable Housing Programs State Housing
Finance Agencies
SUBJECT: Secondary Financing Provided by Nonprofit Agencies and Transferability
Restrictions Permitted for Property with a HUD Insured Mortgage
[….]
II. RESTRICTIONS TO TRANSFERABILITY -- SUMMARY OF RULE
The rule states the long-standing HUD policy that a property with a HUD-insured mortgage shall
be free of restrictions that prevent the borrower from freely transferring the property. The rule
also prohibits a lender from approving restrictions after the loan is closed. The rule uses the term
"legal restrictions on conveyance" to describe such restrictions and this term is broadly defined
to include provisions in any kind of legal instrument that would cause a conveyance (including a
lease) by the borrower to:
Be void, or voidable by a third party.
Be the basis of contractual liability of the borrower.
Terminate, or subject to termination, the borrower's interest in the property.
Be subject to the consent of a third party.
Be subject to limits on the amount of sales proceeds a borrower can retain.
Be grounds for accelerating the insured mortgage.
Be grounds for increasing the interest rate of the insured mortgage.
If a conveyance could cause any of these things to occur, the property is considered to be subject
to legal restrictions on conveyance (referred to as "restrictions" for the remainder of this
Mortgagee Letter) and is usually ineligible for HUD mortgage insurance.
The prohibition on legal restrictions on conveyance is not meant to prohibit all restrictions or
requirements that may be placed on the property or borrower. A property or borrower subject to
requirements such as homeowner fees or ground lease payments may still be eligible for a HUD-
insured mortgage.
However, the rule also describes the circumstances when restrictions do not make the property
ineligible. They are:
HUD-required restrictions on sale to non-creditworthy persons or persons who will not
occupy the property as a principal residence. These restrictions are contained in the
standard mortgage language required by HUD. (Handbook 4155.1 Rev. 4, paragraph 4-2;
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Handbook 4165.1 Rev. 1, Appendix III, paragraph 9(b); Handbook 4330.1 Rev. 4,
paragraph 6-4.)
Restrictions that are part of an eligible program for low- or moderate-income housing
(referred to as an "affordable housing program" for the remainder of this Mortgagee
Letter) and consistent with requirements of the rule. An eligible program must be
operated pursuant to a Federal program, or operated by a State or local government or an
eligible nonprofit organization as defined in the rule. These restrictions are discussed in
greater detail below in Section II (A).
Restrictions related to tax-exempt mortgage revenue bond financing. In addition to the
restrictions allowed for governmental or nonprofit affordable housing programs, the
lender may use HUD's tax-exempt financing rider to provide for mortgage acceleration
for violation of restrictions. (Handbook 4165.1 Rev 1, Appendix XII.)
Restrictions for housing for the elderly. These are allowed if consistent with Federal,
State and local laws and if marketability is not unduly affected.
Restrictions related to the special title situations on Indian lands, Hawaiian Homelands,
the Northern Mariana Islands and American Samoa. These will not necessarily preclude
mortgage insurance.
A. LIMITATIONS ON RESTRICTIONS -- AFFORDABLE HOUSING PROGRAMS
As noted above, borrowers or properties encumbered by legal restrictions on conveyance relating
to affordable housing programs may be eligible for mortgage insurance. A more detailed
description of the restrictions permitted for affordable housing programs is provided in Section II
(B) below. All such legal restrictions on conveyance5 contained in legal instruments used by
relating to affordable housing programs that are otherwise allowed by this HUD policy must
automatically and permanently terminate upon foreclosure, deed-in-lieu of foreclosure, or
assignment of the insured mortgage to HUD. The relevant legal documents must have language
that accomplishes this result terminates any provisions relating to legal restrictions on
conveyance upon foreclosure, deed-in-lieu of foreclosure, or assignment of the insured mortgage
to HUD, however the legal documents themselves (such as ground leases or deed restrictions),
and any provisions unrelated to conveyance therein, do not have to terminate. Merely
subordinating the restrictions to the insured mortgage is not sufficient. The restrictions cannot
come back in force upon subsequent resale by the lender or HUD (except as provided in
regulations for the HOME program).
Restrictions may not be enforced by any of the following consequences for a violation:
Voiding a conveyance by the borrower.
Terminating the borrower's interest in the property.
5 NCLTN would like HUD to clarify that restrictions not pertaining to conveyances (such as lease payments or
maintenance fees) are not prohibited.
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Accelerating the insured mortgage.
Increasing the interest rate for the insured mortgage.
Subjecting the borrower to contractual liability.
The prohibition against contractual liability for violations of any legal restriction on conveyance
covers liability for damages, specific performance or injunctive relief. It does not prevent a
requirement for the borrower to repay with reasonable interest any assistance received in
connection with the borrower's home purchase. The effect of these prohibitions is that the
borrower must have the legal ability to sell his or her home. The borrower does not have to be
allowed to retain the benefit of any financial assistance and, as provided below, the borrower
does not have to be allowed to retain all sales proceeds. Upon a violation of a legal restriction on
conveyance, a The borrower also may be required to sell to the holder of an option or right of
refusal designed to continue the property as affordable housing, such as the nonprofit or
governmental entity operating the affordable housing program (or such entity’s assignee).
Notwithstanding anything to the contrary written above, HUD has waived the regulatory
prohibition on subjecting borrower to contractual liability for violations of legal restrictions on
conveyance for shared equity homeownership programs. Such affordable housing programs may
enforce legal restrictions on conveyance permitted by HUD policy by subjecting the borrower to
contractual liability for any violation of said restrictions.6
HUD acknowledges that many affordable housing programs have legal instruments, such as
ground leases or deed restrictions, which create restrictions on the property unrelated to
conveyance. Such restrictions may include penalties on homeowners for violations. These
restrictions are permitted and may survive foreclosure or deed in lieu of foreclosure, even if the
legal instruments contain restrictions on conveyance that do terminate upon foreclosure or deed
in lieu of foreclosure. An example of such restrictions would be ground lease payments.
The prohibition against terminating the borrower's interest means that the borrower must have
fee simple absolute title instead of title may not have a property interest (fee or leasehold)7 that is
dependent on subsequent events such as fee simple determinable or fee simple subject to a
condition or a limitation. For example, a program in which the borrower may lose title if the
borrower fails to occupy the property for a specified number of years is not allowed. One
exception permits such an arrangement for a Section 203(k) rehabilitation loan as long as the
other holder of interests in title also executes the mortgage. Another exception shared equity
homeownership programs which, pursuant to a HUD regulatory waiver, may terminate a
borrower’s title upon a borrower’s failure to comply with certain legal restrictions on
conveyance such as owner-occupied requirements or violations of rights of first refusal or
purchase options.8
6 NCLTN requests that HUD consider granting such a waiver while the requested regulatory change is pursued.
7 There has been some confusion in Field Office as to whether leasehold interests are eligible for FHA insurance.
They are pursuant to 24 CFR 203.37, and the regulations do not require ground lease termination upon foreclosure
so long as any restriction on conveyance contained therein terminates upon foreclosure or deed in lieu of
foreclosure.
8 NCLTN requests that HUD consider granting such a waiver while the requested regulatory change is pursued.
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An affordable housing program must be designed to serve borrowers with a household income
not to exceed 115% of the median area income, unless the local HUD Office with the
concurrence of HUD Headquarters has approved a higher income in writing (not to exceed 140%
of the median area income).
Currently, the only area with an approved higher income limit is Hawaii, with a limit of 140%.
B. SPECIFIC RESTRICTIONS ALLOWED FOR AFFORDABLE HOUSING
HUD's regulation permits a variety of types of restrictions that ensure the property is preserved
as low or moderate income housing. including limits to the resale price of the property or
recaptures of equity. For example, a borrower may be restricted to selling its property to
purchasers with certain income qualifications, or a property may be encumbered by a restriction
requiring it to be owner occupied.9
Other permitted restrictions include limits to the resale price of the property or recaptures of
equity. A maximum sales price may be imposed or the sales proceeds due the borrower may be
limited (with any excess payable to a governmental body or nonprofit organization for reuse in
an affordable housing program). In either case, when the homeowner sells the property, he or
she must be permitted to recover at least the original purchase price, sales commission, cost of
capital improvements, and any accrued negative amortization if the property was financed with a
graduated payment mortgage. Notwithstanding this requirement, HUD acknowledges that resale
formulas used by affordable housing programs must reflect market realities: a homeowner may
not actually be able to recover the original purchase price, costs of sale commission, costs of
capital improvements or accrued negative amortization if the market does not support such a sale
price. The requirement set forth by this Letter and the rule is only that a homeowner not be
prohibited from recovering the original purchase price, sales commission, cost of capital
improvements, and any accrued negative amortization if the market permits.10
In addition, homeowners must be permitted to recover a reasonable amount of appreciation as
determined by HUD. Appreciation is measured by the difference between fair market value of
the property upon purchase and the fair market value of the property upon resale.11
by the
difference between the original purchase price and the actual price at which the property is
resold. If the program permits the homeowners to sell the property at market value but
recaptures part of the equity, HUD considers a reasonable share of appreciation to be at least 50
percent. HUD does not object to affordable housing schemes whereby the homeowner's share of
appreciation is on a sliding scale beginning at zero, provided that within 2 years the homeowner
9 NCLTN members are finding that some Field Offices believe that all affordability restrictions are prohibited. This
proposed change would hopefully clarify that SEH Programs may have restrictions that protect affordability.
10 Some HUD Field Offices treat the regulatory re-sale formula as a guaranteed resale price that SEH Programs must
provide homeowners. This interpretation is not only not supported by the regulations, but also not realistic in certain
markets. We hope that this change would clarify any confusion.
11 The current definition of appreciation fails to consider that the both the original purchase price and the resale price
of an income- restricted property would be below fair market value. Any change between these numbers may be
unrelated to appreciation of the home itself.
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would be permitted to retain 50 percent of the appreciation. If the program sets a maximum sales
price restriction, the borrower must be permitted to retain 100 percent of the appreciation. The
Department recognizes that other many types of arrangements for sharing appreciation may be
acceptable, and may vary widely depending on the specific assistance provided by an affordable
housing program.12
HUD Field Offices may determine the reasonableness of the appreciation
share in local programs without specific written approval from HUD Headquarters.
Another One method restriction on conveyance commonly used to ensure that housing remains
part of an affordable housing program is for the program sponsor or administrator to hold a right
of first refusal or an option right that can be exercised when the borrower proposes to sell the
home to a purchaser not eligible for the program benefits.13
The use of such purchase options
and rights of first refusal is permitted for all sales This is permitted by HUD policy if: (a) the
rights are held only by a governmental body or eligible nonprofit organization and exercised by
them or someone they have identified as an eligible purchaser, (b) any right is exercised within
45 days after the holder of these rights may exercise them (for example, the rights are often
triggered by a notice of sale from the borrower), and (c) any option price allows the borrower to
recover his or her investment plus a reasonable share of appreciation as explained above.
Affordable housing programs may assign their right of first refusal or purchase option right to
potential homebuyers who qualify for the affordable housing program. The rule also permits
HUD Headquarters to approve option rights to be held and exercised by another person or entity
on a case-by-case basis.
Other permissible restrictions for affordable housing programs are described in the rule.
Restrictions that are not described in the rule are not allowed, unless HUD approved the
restriction in writing before the rule took effect.14
[….]
III. LEASE TERMINATION
Any lease must meet the requirements of Handbook 4010.1 Chg 10, paragraph 3-1 (September
10, 1981) and 15
4150.1 Rev-1, paragraph 6-32, as well as the new rule. The handbooks requires 12
The specificity of this appreciation share formula is problematic from NCLTN’s perspective, as the experience of
its members in implementing shared appreciation programs across the country has demonstrated a need for
flexibility in designing programs and structuring terms. While arbitrary thresholds such as these do little to shield
homeowners from over-reaching programs, they effectively bar homeowners in good programs from using FHA
financing. We believe that Field Officer should evaluate affordable housing program’s appreciation share formula
in the context of their specific market and programmatic details.
13 The regulations do not limit when (pre-foreclosure) right of first refusal or purchase options may be triggered.
Many NCLTN members rely heavily on the purchase option and right of first refusal to keep affordable housing
opportunities available for the families they are trying to serve and exercise such options whenever a buyer proposes
to sell their home. We worry that the deleted language in this section implies that such options may only be used if
a borrower’s sale violates affordability restrictions.
14 As it has been more than a decade since the rule was written place, we believe that HUD provide more flexibility
in considering legal restrictions on conveyance that are not specifically listed in the rule but that may follow the
intent behind the rule.
15 We believe this section of Handbook 4010.1 has been deleted.
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that most ground a leases to provide the lender a right to correct lessee (borrower) defaults upon
receipt of a notice of intent to terminate the lease. In order for this lender's right to be
meaningful, a lease should not be terminable due to a violation the lender cannot correct. Note,
the handbook provides an exception for ground leases made in connection with shared equity
homeownership programs: as approved by HUD, such programs may have lease provisions
permitting the termination for certain lessee defaults that lender cannot cure (such as primary
residency requirements).16
The handbooks and the rule should be interpreted together. The rule will generally prohibit
restrictions that could result in lease termination if the restrictions are violated. For example,
during the time that the property is encumbered by the mortgage, the lessor should not be able to
terminate a lease if the lessee/borrower fails to continue to occupy a property. Such a
termination provision would violate the handbook because the lender could not correct the
violation, and it would violate the rule because even occupancy requirements generally permitted
for affordable housing programs cannot be the basis for terminating the borrower's interest in the
property. However, as noted above, the handbook provides an exception for certain provisions
contained in HUD approved ground leases used by affordable housing programs, including
owner-occupancy provisions or violations of right of first refusal or purchase option. Ground
leases used by shared equity homeownership programs may include termination provisions
triggered by the failure for a borrower to occupy their home.17
Ordinarily, lease terminations unrelated to affordable housing restrictions and correctable by the
lender, such as termination for nonpayment of rent, are permitted and are not affected by the
rule. Such lease provisions, and the ground lease itself, do not need to terminate upon
foreclosure or deed-in-lieu of foreclosure. The Department does not intend to prevent affordable
housing programs such as community land trusts that depend on ground leases, and understand
that the success of such programs is related to restrictions contained within such ground leases,
but standard documents for such programs should be reviewed carefully for compliance with the
rule and modified as needed. HUD has previously approved a model ground lease rider (form
16
NCLTN would request two revisions to the Handbook 4150.1-Rev (1). First, we would request that section 6-
32(A)(6)(a) be revised as follows:
A state, including any political subdivision thereof, of the United States, an Indian Tribe, or an Indian, or a
charitable institution, a church, a university or similar public purpose institution, or an affordable housing program
(as that term is defined by the Secretary) is the lessor and or an option to purchase would not be permitted under
existing laws or regulation.
Second, we would request that the following language be inserted in Section 6-32(A)(7):
Default. Mortgagee must have the right to correct lessee's defaults within 120 days from receipt of notice of
intent to terminate lease because of such default, or such further time as may be necessary to complete foreclosure.
In cases where the ground lease is made in connection with an eligible program for low-or moderate-income
housing, HUD may approve of certain default provisions that the mortgagee may not necessarily be able to cure. An
example would be the model ground lease rider (form ____) that HUD has pre-approved for ground leases used by
affordable housing programs.
17 NCLTN requests that HUD consider granting such a waiver while the requested regulatory change is pursued.
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____) that can be used by affordable housing programs seeking to provide FHA access to their
ground lessees.18
[….]
18
NCLTN has worked with Fannie Mae to create a Ground Lease Rider that is acceptable for properties seeking
Fannie Mae assistance. We would propose working together with HUD to create a similar document for FHA, and
believe that creating such a document will help streamline FHA access for low- and moderate-income homebuyers.