www.hudclips.org 


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

November 30, 1995
 
Mortgagee Letter 95-56
 
TO:  All Approved Mortgagees
 
SUBJECT:  Single Family Property Disposition
          Insured Sales with Repair Escrow
 
     This Mortgagee Letter discusses the advantages and
opportunities of HUD's Single Family Property Disposition Insured
Sales with Repair Escrow Program.  HUD offers its acquired
properties for sale with FHA insured financing available provided
they meet the intent of FHA's Minimum Property Standards (MPS).
However, a significant number of properties entering HUD's
inventory do not, in their present condition, meet those
standards.
 
     The Repair Escrow Program is an important component of the
Department's efforts to increase sales of its acquired
properties, and it assists lenders in building FHA loan
originations.  Importantly, the Repair Escrow Program may help
lenders meet their Community Reinvestment Act (CRA) requirements
while also offering a ready secondary market for loan production.
 
     HUD's Repair Escrow program holds great appeal among
consumers.  It offers homeownership opportunities to qualified
families who would not otherwise be able to purchase and complete
needed repairs without the resources made available through this
program.
 
     The program is easy for mortgagees to implement.  Here's how
it works:
 
     -    HUD-owned properties requiring no more than $5,000 in
          repairs in order to meet the intent of the MPS are
          offered for sale on an insured basis under Section
          203(b).  The actual escrow amount is established at 110
          percent of the estimated repair cost.  Thus, for a
          property with a repair amount at the maximum of $5,000,
          the escrow amount will be $5,500.
 
     -    HUD will determine the cost of the necessary repairs,
          based upon the appraisal, Real Estate Asset Manager's
          (REAM) inspection, and/or staff inspections, as
          necessary.
 
     -    To compensate lenders for establishing and
          administering the escrow account, a fee of $200 will be
          paid by HUD to the lender at the time of sales closing.
          As part of its responsibility for administering the
          escrow account, the lender shall arrange and pay for
          the inspection of the completed repairs.  The lender
          may use either the Mortgagee Certification procedure or
          request an inspection by a panel fee inspector, to
          inform the HUD local office that the work has been
          completed.  If a fee inspector is requested, the lender
          must provide a copy of HUD's list of required repairs
          to the inspector.  Payment for the inspection shall
          come from the lender's $200 fee.
 
     -    Generally, all repairs are to be completed by the
          purchaser within 90 days of closing.  Upon satisfactory
          completion of repairs, the lender must disburse the
          escrow to compensate the buyer or the contractor, as
          appropriate.  If actual repair costs are less than the
          amount escrowed, the balance in the escrow must be
          applied to reduce the outstanding principal balance of
          the mortgage.  If the escrow is inadequate, or if
          additional items of repair are discovered at some
          subsequent date, it is the buyer's responsibility to
          bear the additional cost.  If the buyer fails to
          complete the required repairs within 90 days of
          closing, or such additional time as is determined
          reasonable, or the repairs are unsatisfactory, the
          lender must apply the escrow amount to reduce the
          outstanding principal balance of the mortgage.  It is
          not intended, for these relatively low cost repairs,
          that the lender be required to perform repeated
          inspections.  If the time limit has expired, and the
          lender determines that the repairs will not be
          completed, or not completed satisfactorily, the lender
          may proceed to apply the escrow amount to the unpaid
          principal balance.
 
     -    Both owner-occupant and investor purchasers are
          eligible to purchase HUD-owned properties under this
          program.
 
     -    Any approved Direct Endorsement lender is eligible to
          originate FHA Repair Escrow loans.
 
     If you would like to participate in FHA's Insured Sales with
Repair Escrow Program or have questions concerning the program,
please contact the nearest HUD office.
 
Sincerely yours,
 

Nicolas P. Retsinas
Assistant Secretary for Housing-
Federal Housing Commissioner
.