4350 - HUD
4350.1 REV-1
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CHAPTER 27. SECTION 202 DEBT SERVICE RESERVE
27-1. INTRODUCTION. Information on the debt service reserve
requirement for some Section 202 loan projects is
included in the comprehensive revision to Handbook
4350.1 so Loan Servicers will recognize its purpose and
use. Debt service reserve, as with the reserve fund
for replacements, is a separate line item on financial
forms used in the original Section 202 loan program.
Because the term of these mortgages generally is 50
years, projects financed under the original Section 202
program (funded between 1960-1970) are part of a Loan
Management Branch's portfolio.
Original premise for establishing a debt service
reserve: to provide mortgagors with an extra
"cushion" to meet debt service payments on the
project mortgage and thus, safeguard the project's
financial viability. Time and experience revealed
that such a separate reserve was not needed for
later generation Section 202 projects with Section
8 subsidy and was omitted.
27-2. ELIGIBILITY OF MORTGAGOR. The requirement to fund a
debt service reserve account was applicable to
mortgagors of projects financed under what was known as
the Senior Citizens Housing Loan Program, pursuant to
Section 202 of the Housing Act of 1959. Projects
constructed under this program contain "SH" (for Senior
Housing) in their identification numbers, for example,
999-SHOO10. The legal dockets for "SH" projects
presently reside with Philadelphia's Regional
Accounting Division (RAD). The Field Office with
jurisdiction should have maintained a working file for
each project.
27-3. TECHNICAL FUNDING REQUIREMENT. Controlling documents,
i.e., Regulatory Agreement and Loan Agreement, mandated
a debt service reserve account. The borrower was
required to make an initial deposit to this reserve
account no later than the date of final disbursement of
loan proceeds. At the end of each fiscal year, after
deducting a 90-day operating expense set-aside, any
balance remaining in the Revenue Fund Account, now
known as the project operating account, would be used
for additional deposits to the Debt Service Reserve
Account. Deposits were required until the account
attained an amount equal to one year's debt service on
the project. Mortgagors were released from making
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27-1 9/92
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4350.1 REV-1
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additional deposits provided the account maintained the
balance specified.
Funds in the Debt Service Reserve Account are to
be used exclusively for payments of principal and
interest on the Mortgage Note, or to meet escrows
such as insurance premiums, real estate taxes or
special assessments.
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9/92 27-2
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