the full principal amount of the mortgage note
as initially endorsed.
■The FHA may instruct the trustee to retain the
remaining balance in the construction fund. In
this case, payment of benefits is based on mort-
gage loan advances made prior to the date of the
default. The trustee should convert all LOCs to
cash as soon as possible after the mortgagor’s
default. The remaining balance in the construc-
tion fund should not be used for bond redemp-
tions until the trustee has received instructions
from the FHA about the disposition of these
funds. To ensure that the FHA issues instructions
in a timely manner and to minimize reinvestment
risk, Standard & Poor’s suggests that the inden-
ture make certain requirements of the trustee.
The trustee should notify the FHA that, upon
expiration of the construction fund investment
agreement, the construction fund balance would
be applied to the redemption of bonds. However,
the FHA can request that the trustee deliver the
undrawn balance of the construction fund if the
trustee is notified not less than 30 days prior to
that date.
The following procedures in the indenture will
instruct the trustee if a monetary default occurs and
is not cured by the mortgagor within the 30-day
grace period:
■Once entitled to file a claim for mortgage insur-
ance benefits, the trustee immediately notifies the
HUD area office in writing that an event of
default has occurred. Simultaneously, the trustee
notifies the HUD central office that it intends to
file a claim and will assign the mortgage to the
FHA. At the same time, the trustee notifies the
FHA that the assignment relates to a project
financed with rated bonds and is entitled to pri-
ority processing. A schedule of bond payments
and funds available to (including a statement of
all reserve fund balances) make such payments is
included in the notice. In addition, the trustee
requests payment of the insurance benefits in
cash, if applicable. Standard & Poor’s receives a
copy of each notice.
■The trustee immediately requests forms and
instructions relating to the assignment of the
mortgage. The trustee submits legal documenta-
tion within five days of receipt of the forms and
instructions to HUD’s Office of General Counsel
for review. HUD requires the submission of a
copy of the bond trust indenture or bond resolu-
tion and a bond trustee statement of all reserve
fund balances accompany the claim. The trustee
commences completion of fiscal documentation
in consultation with HUD’s Office of Finance &
Accounting. The trustee should submit this fiscal
documentation and any additional legal docu-
mentation for review as soon as practically possi-
ble, no later than 30 days after recording the
assignment of the mortgage loan.
■Within 30 days thereafter, or any shorter period
required by the FHA, the trustee files its applica-
tion for insurance benefits and assigns the mort-
gage loan to the FHA on the recordation date set
by FHA.
■Within 30 days of recording the assignment of
the loan to the FHA, the trustee submits com-
plete and accurate legal and fiscal documents to
the FHA.
■The trustee may not foreclose on the mortgage.
The trustee should pursue the assignment process
in accordance with the above timetable, even if
the indenture contains a mortgage note cure pro-
vision that allows an additional time for the
mortgagor to bring the mortgage loan current. In
addition, any workout procedures should not
conflict with the assignment process.
The FHA requires mortgagees on projects subject
to HUD Mortgagee Letter 87-9 dated Feb. 20,
1987 to request a three-month extension (the initial
period) of the time to file an insurance claim if the
mortgage default occurs during the prepayment
lockout or penalty period. This is intended to allow
the mortgagee to effect a workout in lieu of assign-
ment. Standard & Poor’s expects the trustee to pro-
ceed with the assignment process simultaneously
with any workout so that in the event a workout is
declared infeasible, the mortgage is assigned to
FHA in a timely manner. In this case, the docu-
ments should indicate that the trustee would follow,
in addition to the steps above, the procedure out-
lined below:
■On becoming entitled to file a claim, the trustee
notifies the HUD area office of the default.
Simultaneously, the trustee files a request with the
HUD central office for a three-month extension to
file a notice of intention and election to assign the
loan (with a copy to Standard & Poor’s).
■The notice of default, as well as any communi-
cations to the HUD central office, includes a
schedule of bond debt service payments indi-
cating funds available to (including a statement
of all reserve fund balances) make the pay-
ments and requests priority processing. In
addition, the trustee immediately requests
forms and instructions relating to the assign-
ment of the mortgage.FHA Insured Multifamily Mortgageshttp://www.standardandpoors.com 253