1. FHA Mortgagee Letter 94-2 (the “Letter”) requires that all restrictions automatically and permanently terminate upon foreclosure, deed-in-lieu of foreclosure, and assignment of the mortgage to HUD. Subordinating the restrictions to the FHA insured mortgage is not sufficient. The restrictions cannot come back in force upon subsequent resale by the lender or HUD.
2. The Letter prohibits the enforcement of the restrictions by (i) voiding a conveyance by the owner, (ii) terminating the owner’s interest in the residence, (iii) accelerating the FHA insured mortgage, (iv) increasing the interest rate on the insured mortgage, or (v) subjecting the borrower to contractual liability (including liability for damages, specific performance or injunctive relief). The owner must have fee simple absolute title and the legal ability to sell his home, and his title cannot be subject to conditions or limitations (e.g., the owner loses his title if he violates one of the covenants or restrictions). However, the Letter provides that the owner does not have to be allowed to retain any financial assistance that he receives or to retain all sales proceeds (see below), and the owner may be required to sell pursuant to an option or right of first refusal.
3. The Letter imposes a maximum income limit of 115% of the median area income, unless a higher limit (not to exceed 140% of area median income) is approved by HUD.
4. The Letter permits restrictions that limit the resale price or that recapture equity upon a resale (with any excess sales proceeds to be payable to a governmental body or nonprofit for reuse in an affordable housing program). In the case of either a limit on the resale price or a recapture of equity, the owner must be permitted to recover (i) his original purchase price, (ii) the sales commission on the resale, (iii) the cost of capital improvements and (iv) a reasonable share of the appreciation (the difference between the original purchase price and the resale price). In the case of restrictions permitting resale at market value and recapturing part of the equity, a reasonable share of the appreciation must be at least 50% of the equity (a sliding scale is permissible if the owner achieves the 50% share after two years). In the case of restrictions setting a limit on the resale price, the owner must receive 100% of the appreciation.
5. The Letter permits restrictions that provide for the exercise of a right of option or first refusal upon a proposed resale by the owner to a purchaser who is not eligible under the program if (i) the right is held by a governmental entity or eligible nonprofit organization and is exercised by them or an eligible purchaser, (ii) the right is exercised within 45 days after the holder may exercise the right, (iii) the option price allows the owner to recover his investment (i.e., original purchase price, reasonable costs of sale, and reasonable costs of improvements) and a reasonable share of the appreciation as described above.
6. The Letter provides a summary and clarification of the requirements in 24 CFR § 203.41 (the “Rule”). The Letter states that restrictions not described in the Rule are not allowed.
7. FHA requires certain actions by lenders within specified time periods for delinquent loans and foreclosures. The requirements in the restrictions must not prevent VHDA from complying with these requirements.