U. S. Department of Housing and Urban Development




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U.S. Department of Housing and Urban Development

H O U S I N G

___________________________________________________________________________

Special Attention of: Notice H 94-66 (HUD)

Secretary's Representatives

Regional Directors of Housing Issued: September 2, 1994

Field Office Directors of Housing Expires: September 30, 1995

Management ___________________________________

Chief Property Officers Cross References: 4330.1 REV-4

Chiefs of Loan Management

Single Family Supervisory Loan

Specialists

___________________________________________________________________________

Subject: Recapture of Section 235 Assistance Payments Guide

(For Field Office Use Only)

The purpose of this Notice is to transmit the attached guide

to Field Offices for use in processing the Satisfaction of Lien

under the Section 235 Recapture of Assistance Payments Program.

The guide contains established policy which has been

compiled into one document for your convenience in processing the

recapture of assistance payment mortgages which are affected by

the recapture provision. It provides step-by-step guidance and

contains examples and sample letters/memoranda, as well as a

helpful table of contents and appendices. The guide should be

used in conjunction with Handbook 4330.1 REV-4, "Administration

of Insured Home Mortgages", Chapters 10 and 11.

The following memoranda and notices have been incorporated

into this guide and are therefore rescinded:

MEMORANDA/SUBJECT DATED

Recapture of Assistance Payments 12/28/82

Documentation Required to Satisfy 02/09/84

Section 235 Recapture Liens

Section 235 Recapture of Assistance 05/22/84

Payments Reasonable Costs of Sale

and Improvements

Satisfaction of Section 235 Recapture 12/11/84

Liens Involving Deeds-in-Lieu of

Foreclosure

Amendment of Redelegation of Authority 01/06/86

for Single Family Housing Programs

___________________________________________________________________________

: Distribution: W-3-1,W-2(H),W-3(H)(ZAOO)(OGC),W-4(H)(OGC),R-1,R-2,R-3,

R-3-1(H)(RC),R-3-2,R-3-3,R-6,R-6-1,R-6-2,R-7,R-7-1,

R-7-2,R-8,R-8-1

Previous Editions Are Obsolete HUD 21B(3-80)

GPO 871 902

2

Section 235 Recapture Program 10/01/86



- Allowing Cost of Appraisal Against

Appreciation of Property - Reimbursement

of Funds to Fee Appraisers

Section 235 Recapture of Assistance 12/23/86

Payments Allowing Reasonable Costs

of Sale on Behalf of Last Eligible

Assumptor

Overpaid Assistance on Section 235 09/29/87

Mortgages Insured After January 5, 1976

Section 235 Recapture Program Activity 04/13/88

Report

Section 235 Recapture Program Activity 05/10/88



Report Expansion of CATEGORY #1 and

CATEGORY #2

Reporting Overpaid Assistance - Section 08/08/88

235 Recapture Program Activity Report

NOTICES/SUBJECT DATED

H 90-54 New Policy for Section 235 08/08/90

Recapture Questions

H 90-56 Section 235 Recapture Program 08/14/90

Retention of Records Requirements

H 90-73 Authorization to Field 09/26/90

Offices to Subordinate HUD

235 Recapture Mortgages to a

Conventional or Department of

Veteran Affairs (VA) Mortgage

in Connection with Refinancing

the First Mortgage

H 93-52 Section 235 Subsidy Recapture 07/15/93

Refinancing the First Mortgage

3

Do not refer mortgagees to the guide. It is for use by HUD



staff only.

If you have any questions, please contact your appropriate

desk officer in Headquarters Single Family Servicing Division.

Sincerely yours,

Nicolas P. Retsinas

Assistant Secretary for Housing

- Federal Housing Commissioner

Attachments

TABLE OF CONTENTS

Page


1-1 GENERAL 1

1-2 MORTGAGES AFFECTED BY THE RECAPTURE PROVISION 1

A. Recapture Not Applicable 1

B. Recapture Provision Applicable 1

C. Revised/Recapture/10 Mortgages (Assistance

for 10 Years) 2

D. Special Programs 2

E. FHA Case Numbers 2

1-3 SINGLE FAMILY CASE BINDERS 3

1-4 MORTGAGEE'S RESPONSIBILITIES 3

1-5 HUD'S RESPONSIBILITIES 4

A. Security Instruments 4

B. Track the Recapture Process 4

C. Request Recapture Documents 4

D. Determine Recapture Amount 4

E. Recapture the Amount Due 4

F. Satisfy the Lien 5

G. Record the Satisfaction of Lien 5

H. Prepare Appropriate Correspondence 5

1-6 REVIEW OF DIFFICULT CASES BY REGIONAL/HEADQUARTERS

STAFF 5

1-7 TRACKING THE RECAPTURE CASE 6



A. Log 6

B. Recapture Log Retention Period 7

1-8 DOCUMENTS REQUIRED TO PROCESS THE CASE 7

A. Request Documentation 7

B. Documentation Nonreturnable 8

C. Termination of Assistance 8

1-9 WORKSHEET 8

(PART ONE - NET APPRECIATION)

A. Selling Price 8

B. Purchase Price 9

C. Appreciation 9

D. Less (Subtract from Appreciation) 9

E. Net Appreciation 9

(PART TWO - RECAPTURE)

A. Total Assistance (Subsidy) Paid to Date 10

B. One-Half of Net Appreciation 10

C. Amount of Assistance to be Recaptured 10

D. Worksheet Signatures 10

1-10 APPRAISALS 10

A. Fair Market Value 10

B. Low Selling Price 11

C. Pay Off of the HUD Lien 11

D. Refinance of the First Mortgage 11

E. Securing the Appraisal 11

F. Reimbursement for Services Rendered by Fee

Appraiser 11

1-11 REASONABLE COSTS OF SALE 12

A. Allowable Costs 12

B. Costs Not Allowed 13

1-12 REASONABLE COSTS OF REFINANCING THE FIRST MORTGAGE 14

A. Allowable Costs 14

B. Costs Not Allowed 14

1-13 REASONABLE COSTS OF IMPROVEMENTS 14

A. Allowable Costs 14

B. Costs Not Allowed 16

C. Document the Field Office Files 16

D. Consulting with Valuation Staff 16

1-14 SPECIAL IMPROVEMENTS 16

A. Land Issues 16

B. Special Assessments 19

1-15 DEMAND FOR PAYMENT OF RECAPTURE AMOUNT 22

A. Lump Sum Payment 22

B. Who Pays the Recapture Amount 23

C. Demand Letter 23

D. Claims Collection Officer (CCO) 23

1-16 DISPOSITION OF FUNDS 24

A. Collection Register 24

B. Deposit Instructions 24

C. Reporting to OFA 24

1-17 INSTALLMENT PAYMENTS ON RECAPTURE AMOUNT 24

A. Determine Length of Installment Period 25

B. Compute Interest 25

C. Accounts Receivable File 26

D. Notification to the Mortgagor/OFA 26

E. Satisfy the HUD Lien 27

1-18 REFUNDING RECAPTURE AMOUNT TO MORTGAGOR 27

1-19 COMPROMISING FUNDS 27

A. Overpaid Assistance 27

B. Recapture Amount 28

1-20 SUBMITTING RECAPTURE CASE TO THE FIELD COUNSEL 28

A. Collection of Information 28

B. Send Memorandum 28

1-21 NOTARIZING, RECORDING, TRANSMITTING - SATISFACTION

OF LIEN 29

A. Notarizing Satisfaction of Lien 29

B. Recording Satisfaction of Lien 29

C. Transmittal Letter 29

1-22 FRAUD AND ABUSE 29

A. Review the Case 29

B. Request Recertifications 30

C. Refer Case to Office of Inspector General 30

1-23 RETENTION OF CASE FILE 30

A. Closed File 30

B. Open File 31

C. Inactive File 31

1-24 SUBORDINATION OF HUD'S LIEN 31

A. Authorization to Approve Requests 31

B. Conditions for Subordinating HUD's Lien 32

C. Final Determination 32

D. Section 235(r) Subordination 33

1-25 DISPOSITION OF THE MORTGAGE 33

A. Payment in Full of First Mortgage Without Sale of

the Property 33

B. Payment in Full - First Mortgage (Full Term) 35

C. Payment in Full of Second Mortgage Without

Paying Off the First Mortgage 35

D. Refinancing the First Mortgage 35

E. Assignment of the First Mortgage to the Secretary 38

1-26 DISPOSITION OF PROPERTY 38

A. Sale of the Property 39

B. Rental of Property 39

C. Pre-Foreclosure Sale 41

1-27 ASSUMPTIONS 42

A. Assumptor Eligible for Assistance Payments 42

B. Assumptor Not Eligible to Receive Assistance

Payments 42

C. Assumption of Recapture 10 (Restructured 10)

Mortgages 43

D. Last Eligible Mortgagor - Costs of Sale and

Costs of Improvements 44

1-28 OVERPAID ASSISTANCE 44

A. Possible Reasons for Overpaid Assistance 44

B. Assisting the Mortgagee in Properly Administering

Assistance Payments 46

C. Refunding Overpaid Assistance to the Department 46

D. Overpaid Assistance and Recapture Owed by

Mortgagor 47

E. Underpaid Assistance 47

F. Total Assistance Paid Prior to Completion of

Recapture Calculation 47

G. Estimate Recapture of Assistance 47

H. Reconstruct the Mortgagors' Records 48

I. Terminate the Assistance Payment Contract 48

J. Reporting Overpaid Assistance 48

1-29 FORECLOSURE OF HUD'S LIEN 49

A. Recommendation to Foreclose 49

B. Decision to Not Foreclose 50

C. Foreclosure -- Acquiring the Property 50

1-30 HUD-ACQUIRED PROPERTY 51

A. Deed-in-Lieu of Foreclosure 51

B. Foreclosure 52

1-31 SPECIAL CIRCUMSTANCES 52

A. Relocation of the Mortgage by an Employer 52

B. Relocation of Mortgagor (Eminent Domain) 54

C. Seizure of Property by U.S. Federal Marshals 55

D. Bankruptcy and the HUD Lien 56

1-32 REPORTING SECTION 235 RECAPTURE ACTIVITY 57

A. Submitting Recapture Activity 57

B. Submitting Overpaid Assistance Activity 58

1-33 SECTION 235 RECAPTURE PROBLEMS 58

A. Case Not Under Section 235 Recapture Program 59

B. No Second Mortgage (or Deed of Trust) 59

C. Second Mortgage (or Deed of Trust) Executed

but Not Recorded 60

D. HUD's Lien not Found During Title Search 61

E. HUD Lien Not Satisfied at Refinancing of

First Mortgage 62

F. HUD's Lien Recorded in First-Lien Position 63

G. HUD's Lien Recorded on the Wrong Property 64

H. Note not Executed by Assumptor 64

I. Assumption Note Recorded - Assumption not

Completed 65

J. Assumption - New Second Mortgage Recorded 65

K. Assumption - Lien Satisfied - Assumptor

Receiving Assistance 65

L. Partial Release of Security Instrument 66

M. Lost Notes 66

N. Mortgagee Collected Recapture Amount -- Recapture

Amount not Received by HUD 66

1-34 ADDITIONAL INFORMATION 67

A. Costs of Sale and Improvements Affected by Who

Pays the Recapture Amount 67

B. Who Paid for the Improvements 68

C. Compromising the Recapture Amount in the Best

Interest of the Department 68

D. Recapture Amount as a Tax Deduction 70

E. Congressional Inquiries 70

F. Death of the Mortgagor 72

1-35 HUD EMPLOYEE WITH A SECTION 235 MORTGAGE 72

APPENDICES

RECAPTURE OF SECTION 235 ASSISTANCE PAYMENTS

1-1 GENERAL.

The Housing and Community Development Acts of 1980 and 1981

changed Section 235 of the National Housing Act to allow the

Secretary of Housing and Urban Development to require recapture of

all, or a portion of, the assistance payments made on behalf of

mortgagors who obtain FHA-insured mortgages under Section 235(i).

The Assistant Secretary for Housing - Federal Housing Commissioner

redelegated authority to the HUD Field Offices to process the

satisfaction of the HUD lien on FHA-insured mortgages under the

Section 235 Recapture Program. This authority was published in the

Federal Register, Volume 50, No. 201, dated October 10, 1985, Section

A, Paragraph No. 3 (Appendix 1) and referred to in the mortgagee

servicing Handbook 4330.1, REV-4, Administration of Insured Home

Mortgages (hereafter referred to as Handbook 4330.1), Chapter 11.

1-2MORTGAGES AFFECTED BY THE RECAPTURE PROVISION. The Firm Commitment

Date -- not the Endorsement Date -- determines whether an FHA-insured

Section 235 mortgage has or should have a Recapture lien on the

property. This date is located at the center, right-side of Form

HUD-92900-4, Firm Commitment for Mortgage Insurance under the

National Housing Act (Appendix 2).

The Recapture provision does not apply to all Section 235 cases. If

the Field Office is not sure that the recapture provision applies,

the insurance case binder must be reviewed (see Paragraph 1-3 below)

before processing a case.

A.Recapture Not Applicable. If the Firm Commitment date is on or

before May 26, 1981, the first mortgage is not under the Section

235 Recapture Program, even though the settlement date occurred

after May 26, 1981. The suffix of the FHA case number of

mortgages insured under the first and second Section 235

Assistance Program allocations ends in the number five (Example:

000-000000-005).

B.Recapture Provision Applicable.

1.If the Firm Commitment date is on or after May 27, 1981, the

first mortgage is under the Section 235 Recapture Program,

even though the suffix of the FHA case number ends in the

number five (5). The suffix for the majority of mortgages

insured under the Section 235 Recapture Program ends in the

number six (Examples: 000-000000-006).

2.If the Firm Commitment date is on or after October 27, 1984

(24 CFR 235.12(a)), the first mortgage is

2

under the Section 235 Revised/Recapture/10 Program (see 1-2C



below). The suffix of the FHA case number for mortgages

insured under the Section 235 Revised/Recapture/10 Program

ends in the number forty-six (Example: 000-000000-046).

C.Revised/Recapture/10 Mortgages (Assistance for 10 Years).

Revised/Recapture/10 mortgages receive Section 235 assistance for

a period up to ten years. Assistance payments on these mortgages

are monitored by an automated system in the Office of Finance and

Accounting, Subsidized Housing Programs Division, Subsidy

Accounting Branch.

1.At the end of the ten-year period, the mortgagee must

terminate the assistance payment contract, if there is not a

request by the Department to continue the assistance. If

the mortgagor can prove hardship and, provided funds are

available, the mortgagor can continue to receive Section 235

assistance, if otherwise qualified. Termination of the

assistance at the end of the ten-year period does not

trigger the recapture provision. (See Handbook 4330.1,

Paragraph 10-26.)

2.When the ten-year period ends, the lien will remain in

second-lien (or third-lien position if a State or local

government has a lien on the property) until an event occurs

that would trigger the recapture provision (Handbook 4330.1,

Paragraph 11-9); or, if requested, the Field Office will

calculate the recapture amount, collect it (if any), and

satisfy the HUD lien at any time.

D.Special Programs. A case may have been processed under a special

program and should not be processed under the Recapture Program.

It is extremely important to review the case binder to determine

whether the recapture provision is applicable before proceeding

with the satisfaction of lien, if the suffix of an FHA case

number ends in the number six (6); the Firm Commitment date is

within a short period of time after May 27, 1981, and the

mortgage settlement is dated the same date as the Firm Commitment

or shortly thereafter.

E.FHA Case Numbers. Some FHA case numbers have a single digit

before the last three digits (Section of the Act):

000-000000-0000. An FHA case number that does not have that

digit does not mean that the number is wrong. A review of the

case binder will help to determine whether the case falls under

the recapture provision.

3

1-3SINGLE FAMILY CASE BINDERS. If there is any question regarding the



firm commitment date or there is a need to review the insurance case

binder before processing a recapture case, request the insured case

binder from the Director, Single Family Records Branch, Headquarters,

Room B-264:

oUse Form HUD-60, Request for Single Family Case Binder or Form

HUD-144, Record of Telephone Request for Single Family Case

Binder (Appendix 3(A) and (B)).

oProvide the mortgagor's FHA case number and the FHA insurance

endorsement date.

oReview the insured case binder to verify the firm commitment and

settlement dates to determine whether the case should be

processed under the Recapture Program and to obtain other

information relative to the case.

oReturn the insured case binder to the Records Branch immediately

after use.

1-4MORTGAGEE'S RESPONSIBILITIES. The mortgagee must service Section 235

mortgages in accordance with the general program and recapture

guidelines in Handbook 4330.1, Chapters 10 and 11. Briefly, the

mortgagee must:

oprovide the mortgagor with a copy of the "Notice to Buyer" which

describes the requirements for repayment of all, or a portion of,

the assistance payments.

omake certain that the mortgagor executes the documents to assure

repayment of the recapture of assistance (24 CFR 235.12(d)) at

the closing of the first mortgage.

oassure that the documents creating the second lien are recorded

at the same time as those creating the first lien and that the

liens are recorded in the proper order. The original second lien

documents should be retained by the local HUD Field Office until

the lien is satisfied.

NOTE:HUD will agree to subordinate should the recapture lien

be inadvertently recorded in first position. The

mortgagee's lien will not be insurable if it is not in

first-lien position.

oprovide the Field Office, upon request and in writing, the total

amount of assistance paid on behalf of the original mortgagor and

any assumptors of the mortgage.

4

oserve as the "go-between" where necessary in advising the



mortgagor of the necessary documentation required to compute the

recapture amount.

NOTE:THE MORTGAGEE MUST NOT ASSUME ANY DUTIES CONCERNING THE

CALCULATION OF THE RECAPTURE AMOUNT OR THE ACCEPTANCE

OF THE RECAPTURE PAYMENT (unless the mortgagee is the

party that requested satisfaction of HUD's lien).

SHOULD THE MORTGAGEE RECEIVE THE RECAPTURE PAYMENT, IT

MUST FORWARD THE RECAPTURE AMOUNT TO THE DEPARTMENT

IMMEDIATELY UPON RECEIPT.

1-5HUD'S RESPONSIBILITIES. Whenever one of the events described in

Handbook 4330.1, Paragraph 11-9 occurs which triggers the recapture

provision (24 CFR 235.12(a)(1)(2)and (3)), the mortgagee, an

attorney, a title company, or other settlement party must advise the

local HUD Field Office of the action taken and provide the Field

Office the items outlined in Handbook 4330.1, Paragraph 11-12. The

Field Office is responsible for the following:

A.Security Instruments. The Field Office shall retain the Section

235 Recapture security instruments (note and second mortgage or

deed of trust with addendum) in a locked file cabinet and/or

storage room in the Field Office. If the documents are not found

in the Field Office file, request the insured binder from the

Single Family Records Branch (Paragraph 1-3 above).

B.Track the Recapture Process. The Field Office must have a system

for tracking the status of the recapture case once the recapture

process is begun and document the progress of the case.

C.Request Recapture Documents. The Field Office shall request the

items noted in Handbook 4330.1, Paragraph 11-12 to obtain the

information needed to compute the recapture amount (Paragraph 1-9

below).

D.Determine Recapture Amount. Based upon documents and data



submitted to the Department, the Field Office determines the

amount of assistance to be recaptured regardless of whether the

first mortgage is held by a HUD-approved mortgagee or is a

Secretary-Held mortgage.

E.Recapture the Amount Due. The Field Office must calculate the

recapture amount using the Recapture of Assistance Worksheet

(Appendix 4). Paragraph 1-9 below provides guidance in

determining the recapture amount, which is THE LESSER OF:

5

1.the total amount of assistance paid on behalf of the



mortgagor (and any previous mortgagors); or

2.50 percent of the net appreciation of the property.

NOTE:Net appreciation is any increase in the value of a

property over the original purchase price, minus

reasonable costs of sale, costs of refinancing the

first mortgage or cost of an appraisal when paying off

the HUD lien, and minus the reasonable costs of

improvements made to a property.

When the recapture amount has been determined, the Field Office

shall notify the party that requested the satisfaction of lien of

the amount due, collect the payment and deposit the recapture

amount (if any), within one day of receipt.

F.Satisfy the Lien. The Single Family Loan Management Branch shall

request the Field Office Legal Counsel (Paragraph 1-20 below) or

the office staff (trained in the preparation of satisfaction of

liens) to satisfy the lien.

G.Record the Satisfaction of Lien. Once the satisfaction of lien

is prepared and signed by an authorized official, the Single

Family Loan Management Branch must have it recorded, unless the

requesting party states, in writing, that he/she will have the

document recorded (see Paragraph 1-21).

H.Prepare Appropriate Correspondence. All correspondence prepared

by the Field Office regarding satisfaction of the HUD lien must

include the mortgagor's name and address, FHA case number,

mortgagee's loan number (when writing to the mortgagee), specific

facts regarding the case, name and telephone number of a contact

person, and list all documents attached to the correspondence.

1-6REVIEW OF DIFFICULT CASES BY REGIONAL/HEADQUARTERS STAFF. Field

Offices no longer contact Headquarters directly for guidance on

recapture cases (effective August 8, 1990). Field Offices must

direct questions/problems to supervisors, following the Field Office

chain of command, in resolving all recapture issues (except

compromise payments of overpaid assistance which is discussed in

Paragraph 1-19 below) and recapture amounts over $500.00, prior to

contacting Headquarters for assistance.

In addition, the Field Office must have a prepared recommendation for

Headquarter's review, backed up with

6

detailed information regarding the circumstance(s), i.e., whether a



case is under the recapture of assistance program, allowance(s) in

the recapture calculation, etc. (see Appendix 5).

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