www.hudclips.org 


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

July 16, 1996
 
MORTGAGEE LETTER 96-37
 
TO:  ALL APPROVED MORTGAGEES
 
SUBJECT:  Single Family Loan Production - Amendatory Clause
 
     Section 226 of the National Housing Act requires that the
purchaser of property be provided a written statement of the
appraised value of the property.  The statement must be provided
before the sale of the property.  As this requires an appraisal
at a time out of the normal sequence of the mortgage origination
process, HUD has implemented Section 226 by permitting the buyer
and seller to sign a sales contract before the statement of
appraised value is delivered if the contract contains, or is
later amended to contain, a provision permitting the purchaser to
escape the purchase obligation without loss if the appraised
value is less than the contract sales price.  This provision is
generally implemented using the FHA "amendatory clause".
 
     The amendatory clause approach works well with a traditional
home seller such as an owner-occupant, builder or real estate
investor.  The approach does not work well with non-traditional
sellers such as secondary mortgage market providers (Fannie Mae,
Freddie Mac, etc.); Federal, State and local governmental
agencies; mortgagees disposing of REO assets; or sellers at
foreclosure sales.  These sellers typically will not condition
the sale on the results of a future appraisal.  These agencies
and organizations own the property as a by-product of their
primary function (loan servicer, taxing authority, etc.)  As a
result, their REO assets are generally priced to move out of
inventory as quickly as possible or, in the case of foreclosure
sales, are sold publicly through competitive bidding.  The
requirement of the amendatory clause causes some agencies and
organizations not to sell their REO to purchasers using FHA-
insured loans.  This removes a supply of affordable homes from
FHA programs.  The Department has also determined that the
amendatory clause requirement can be an impediment to the Section
203(k) program.  Therefore, the Department has modified the
requirement for the amendatory clause as follows.
 
                               -2-
 
     For all Section 203(k) transactions, regardless of the type
of seller or purchaser, (owner occupant, investor, or non-profit
organization), HUD has determined that the amendatory clause is
not required since Section 226 and 24 CFR 203.15 apply only when
the mortgage amount must be based on an appraisal.  As explained
in Mortgagee Letter 94-11, this is not the case for Section
203(k) rehabilitation loans where the "as-is" value can be
estimated by other means.
 
     For other single family programs where a non-profit
organization or governmental agency is eligible to be the
mortgagor, the Department has determined that it will not require
the amendatory clause when the transaction involves a non-
traditional seller, as described above.  This exception is
permitted because Section 226 and 24 CFR 203.15 apply only when
the mortgagor will be an owner-occupant.
 
Sincerely yours,
 

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