Untitled Texas Attorney General Opinion

• Court: Texas Attorney General Reports
• Decided: July 2, 1966
• Docket: C-793
• Status: Published

Opinion

NEP GENERAL

EXAS

Honorable Preston Smith Opinion No. C-793 Lieutenant Governor State of Texas Austin, Texas Re: Eligibility of FHA insured first lien mortgages as invest- ments ,forthe Per- manent University Fund of the University of Texas, and the author- ity of the Board of Re- gents of the University of Texas, the State Board of Education, the State Board of Trustees of the Employees Re- tirement System and the State Board of Trustees of the Teacher Retire- ment System to contract for the servlclng of FRA insured first lien Dear Governor Smith: mortgage Investments. You have requested reconsideration of Attorney General's Q$-&o~8o ww-484 (August 5, 1958), hereinafter referred to - . In that opinion, the Attorney General said the Permanent University Fund could not enter into contracts for servicing mortgages insured by the Federal Housing Administra- tion (FHA) because: "The first lien real estate mortgage securities Inquired about are not guaranteed in whole as required by Section lla of Article VII of the Constitution of Texas and are not eligible as an investment of the Permanent University Fund of the University of Texas."

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2 Honorable Preston Smith, page 2 (C-793 )

Your request points to changes in the statutes and regulations pertaining to FHA Insured mortgages since WW-484 was rendered and closes with two questions that will be an- swered in order. "(1) ARE FHA INSURED FIRST LIEN REAL ESTATE MORTGAGES NOW ELIGIBLE AS AN INVESTMENT FOR THE PERMANENT D THE UNI- VERsTTY Ww-484 was limited to those mortgages insured by the FHA under Section 203 of the National Housing Act (12 U.S.C. Sec. 1709), as amended, hereinafter referred to as the Act; this opinion is also so limited. The basic question recited in WW-484 was whether or not such mortgages were "guaran- teed In whole" as required by Section lla of Article VII of'the'Constltution of Texas, the pertinent part of which provides that: "/?? -- The Permanent University Fund may be invested in first lien real estate mortgage securities guaranteed in any manner in whqle by:the United States Government or any agency thereof . . . . In making each and all of such investments said Board of Regents shallexer- cise the judgment and care under the clrcum- stances then prevliling which men of ordinary prudence, discrct$onand intelligence exercise in the management of their own affairs not in regard to speculation but in regard to the permanent disposttion of their funds, consider- ing the probable income therefrom as well as the probable safety~of their capital . . . . This amendment shall be self-enacting . . . .' After consideration of the statutes and regulations in effect on August 5> 1958, the Attorney General concluded in W-484 that the FHA insurance was not sufficient to render the mortgages "guaranteed . . . in whole" for the benefit of the Permanen,tUniversity Fund. The Attorney General has always recognized the general effect of Section lla, Article VII of the Constitution of Texas. In Attorney General's Opinion No. m-263 (December 31, 1956), it was stated:

-3805- Honorable Preston Smith, page 3 (C-793 )

"A consideration of the provisions of. Article 7, Sections 10, 11, 11(a),,12 and 15 of the Constitution of Texas, shows quite clearly that the only change in our Consti- tution affected by the adoption of Article 7, Section 11(a) was to increase the permis- sive investments of the Permanent University Fund. The sole purpose of the endowment or non-expendable fund is to produce revenue to maintain the institution endowed, and the new provision of the Constitution is merely to aid in the procurement of that objective by the broadening of the investment port- folio." This statement was reiterated in Attorney General's Opinion No. W-69 (March 18, 1957). After careful consideration of amendments to the Act and the regulations promulgated thereunder, this office consents to reconsider 'che,conclusionin WW-484 that FJJA insured first lien mortgages are not eligible investments for the Permanent University Fund. The Act has been changed many times; therefore, for convenience all citations will be to the provisions of the Act as found in Title 12, U.S.C., Sections 1701 et. seq. In W-484, portions of Section 204 of the Act (12 U.S.C. Set . 1710) were quoted in order to outline the procedure re- quired when a mortgage has been foreclosed. Those portions will again be quoted with the relevant changes thereto em- phasized: "(a) I:nany case in which the mortgagee under a mortgage insured under section 1709 of this title flection 203 of the Act 7shall have foreclosed and-taken possession of ths mortgaged property in acecrdanse with regulations of, and within a period to be determined by, the Commissicnez~or shall, with the consent of the Commissfo.ner,have otherwise acquired such property from the mortgagor after default, the mortgagee shaX. be entitled to receive the benefit cf the insurance as hereinafter pro- vided, upon (1) the prompt conveyance to the Commissioner of title to the property which

-3806- Honorable Preston Smith, page 4 (C-793 )

meets the requirements of rules and regulations of the Commissioner in force at the time the mortgage was insured, and which is evidenced in the manner prescribed by such rules and regulations, and (2) the assignment to him of all claims of the mortgagee against the mort- gagor or others, arising out of the mortgage transaction or foreclosure proceedings, except such claims as may have been released with the consent of the Commissioner. Upon such conveyance and assignment . . . the Commissioner shall, subject to the cash adjustment hereln- after provided, issue to the mortgagee deben- tures having a total face value equal to the value of the mortgage and (subject to sub- section (e) (2) of this section) a certifi- cate of claim, as hereinafter provided. For the purposes of this subsection, the value of the mortgage shall be determined, in accord- ance with rules and regulations prescribed by the CommLssioner, by adding to the amount of the original principal obligation of the mortgage which was unpaid on the date of the institution of foreclosure proceedings, or on the date of the acquisition of the property after default other than by foreclosure the amount of all payments which have been made by the mortgagee for taxes, ground rents, and water rates, which are liens prior to the mort- gage, speciab assessments which are noted on the application for insurance or which become liens after the Wsurance of the mortgage,

- - insurance premiums, and any tax imposed by the United States upon any deed or other instrument by which said property was acquired by the mortgagee and transferred or conveyed to the Commissioner and by deducting from such total amount any amount received on

-3807- Honorable Preston Smith , page 5 (C-793 )

account of the mortgage after either of such dates, and any amount received as rent or other Income from the property, less reason- able expenses incurred in handling the pro- perty, after ei,therof such dates And provided further, That with respect ;o mortgages whi.chare accep,tedfor insurance under Section 203(b) (2) (D) or under the second proviso of section 1713 (c) (2) of this title, or under section 1715e of this title, or with respect to any mortgage accepted for insurance under section 1709 of this title on or after August 2, 1954, there may be included in the debentures issued by the Commissioner on account of the cost of foreclosure (or of acquiring the property by other means) actually paid by the mortgagee and approved by the Commissioner an amount, not in excess of two- thirds of s.uchcost or $75 whichever is the greater: And provided further, That with res- pect to a mortgape accepted for insurance pur- suant to a commitment issued on or after Sep- tember 2, 1964, the Commissioner may include in debentures or in the cash payment an amount not to exceed the foreclosure, acquisition, and conveyance costs actually paid by the mortgagee and approved by the Commissioner And pro- vided further, That where the claim'is paid in zn -.-,. I_~ be included in the cash pay- there shall ment an amo,un,tegui,valentto the compensation for loss of debenture interest that would be included in computing debentures if suchim were being paid in debentures . . . .'I12 zT.S.C., Section 1710(a) (Kmpk,asisadded). In 1958, a mortgagee who foreclosed and took possession of the mortgaged property upon the mortgagor's default had the right to receive payment of FHA insurance in the com- bination of (1) .FHAdebantures, (2) cash up to $50 and (3) a certificate of claim, As demonstrated by the changes in the Act and discussed in greater detail, infra, the form of payment of PHA insurance has changed considerably. In W-484, Section 294(e) of the Act (12 U.S.C. Sec. 1710(e)!, which defines a certificate of claim, was used as evidence that the tnta~lrace value of the debentures

-3808- Honorable Preston Smith, Page 6 (C-793 )

plus the cash adjustment could possibly be insufficient to make a mortgagee (the Permanent University Fund) whole when a mortgage was foreclosed, That provision now reads: "(e) (1) Subject to paragraph (2), the certificate of claim issued by the Commissioner to any mortgagee shall be for an amount which the Commissioner determines to be sufficient, when added to the face value of the debentures issued and the cash adjustment paid to the mort- gagee, to equal the amount which the mortgagee would have received if, at the time of the con- veyance to the Commissioner of the property covered by the mortgage, the mortgagor had redeemed the pro- perty and paid in full all obligations under the mortgage and a reasonable amount for necessary expenses incurred by the mortgagee in connection with the foreclosure proceedings, or the acquisi- tion of the mortgaged property otherwise, and the conveyance thereof to the Commissioner. Each such certificate of claim shall provide that there shall accrue to the holder of such certificate with respect to the face amount of such certificate, an increment at the rate of 3 per centum per annum which shall not be compounded. The amount to which the holder of any such certificate shall be en- ' titled shall be determined as provided in subsection (f) of thls section.

(2) A certificate of claim shall not be issued and the provisions of paragraph (1) of this sub- section shall not be applicable in the case of a mortgage accepted for insurance pursuant to a com- mitment issued on or after September 2, 1964." -(Emphasisadded). Further, the FHA regulations provide: I "If the mortgage was accepted for insurance pursuant to a commitment issued on or after Sep- tember 2, 1964, no certificate of claim shall be issued.' 211C.F.R., Section 203.4:5(b). See also letter from FHA Commissioner to all approved mortgagees dated September 2* 1964 (64-10).

-3809- Honorable Preston Smith, page 7 (c-793 1

In wW-484 the protection afforded the Permanent University Pond by the FHA in the event of default by the mortgagor and foreclosure by the mortgagee was examined. Today, the payment of insurance benefits is somewhat different. First, the Act provides: "Notwithstanding any other provisions of this chapter with respect to the payment of insurance benefits, the Commissioner Is autho- rized, in his discretion, to pay in cash or In debentures any insurance claim or part thereof which Is paid on or after August 10, 1965, on a mortgage or a loan which was insured under any section of this chapter either before or after such date. If payment is made in cash, it shall be in an amount equivalent to the face amount of the debentures that would otherwise be issued plus an amount equivalent to the interest which the debentures would have earned, computed to a date to be established pursu%nt to regulations issued by the Commissioner. 12 U.S.C., Section 1735d(a). Further, the regulations provide: "If the application for insurance bene- fits is acceptable to the Commissioner, pay- ment of the insurance claim will be made in cash, in debentures or in a combination of both, as determined by t;e ;Ki,;siPoner at the time of the payment. 0 . a, Section 203.400. The present policy of the FHA is found in a letter from the Commissioner to all approved mortgagees dated August 10, 1965 (65-g) that says on pages 5 - 6: "FHA is now authorized to settle all mortgage insurance claims in cash or deben- tures at the option of FHA. All claims re- ceived on and after September 1, 1965, will be paid in cash, unless the mortgagee speci- fically requests debentures when the claim is filed. A 90% partial settlement will be made within 5 days after the claim is received. The

-3810- Honorable Preston Smith, page 8 (C-793 )

final settlement will be made after receipt of fiscal data and title requirements. The partial and final settlement will include an interest allowance, comparable to the deben- ture rate, on the amount of the settlement. No cash remittances are to be made to FHA covering escrow deposits, undisbursed mort- gage proceeds, etc. These amounts will be retained by the mortgagee and offset in the claim settlement." The formula for determining the amount of payment the FHA will make is found in 24 C.F,R., Sections 20x.401-203.404. Should the,,mortgageeelect to accept debentures, the debentures are fully and unconditionally guarantee: as to principal and &cerest by the United States 12 U.S.C., Section 1710(d). (Emphasis added). The'int&&t rate on'debentures is established by the method set out in 12 U.S.C., Section 17150 and the regulations provide that: "Debentures shall bear interest from the date of issue, payable semiannually on the first day of January and the first day of July of each year at the rate in effect as of the date the commitment was issued, or as of the date the mortgage was endorsed for insurance, which ever rate is the higher .[on or after July 1, 1966, the effective rate is 4 5/8$-T." 24 C.F.R., Section 203.405. Debentures mature twent years from the date of issuance. 24 C.F.R., Section 203.;: 06. The mortgagee now has ,theoption of (1) obtaining a cash payment of benefits, or (2) requesting debentures that are guaranteed by the United States. Even if the FHA Commissioner's policy should change the mortgagee would be paid in a combination of cash and debentures; the certifi- cates of claim have been abolished by Congress. FHA in- sured first lien mortgages, therefore, meet the constitutional standard and are now eligible investments for the Permanent University Fund, The mortgagee's option is to be exercised, of course, by the Board of Regents under the prudent investor standard set out in Section lla, Article VII of the Constitu-

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ticn cf Texas. The answer to your first questlon is, therefore, af?irmative.

We have held, supra, that the Permanent University Fund is authorized to invest in FRA insured first lien mortgages. The following Funds can also be invested in FHA insured first lien mortgages: (1) Permanent School Fund. Article VII, Section 4 of the Constitution of Texas and Article 2669(d), j V.C.S. (2) State Retirement, Disability and Death Compensation Fund. Article XVI, Section 62(a) of the Constitution of Texas and Ar,ticle62!28a,Section 7A, V.C.S. eat er Retirement Fund. Article III, ,,t;k! ika::dn4t:bhof the Constitution of Texas and A&icle 2922-1, Section 13(l), V.C.S. The authority of the Board of Regents of the University of Texas, the S'ca,te Board of Education, the State Board of Trustees of the Employees Retirement System and the State Board of Trustees or the Teacher Retirement System of Texas (the agencies charged wi,thadministration and control of each Fund) to c0ntrac.F: f'orservicing of mortgages is not ex- There is, however, no statutory pressly provided by sta.t%.:.te. prohibition. In Attornev Generalvs Gninion No. W-69, supra, it was said with refer+znceto a proposed procedure for the purchase and sale of corporate securities for the Permanent Univer- sity Fund: . . .

Honorable Preston Smith, page 10 (C-793)

"Article VII, Section 11(a), by its own terms, is self-enacting and the absolutely essential powers to carry the program into effect are necessarily conferred upon the Board of Regents by implication. The pay- ment of such required commissions, fees and taxes, before the delivery of the securities to the Permanent University Fund at the State Treasury, are costs of acquiring the securities and must be said from the Permanent Universitv Fund. This is the ordinary and customary busi- ness and accounting practice and the constitu- tional provision infers that the customary busi- ness procedures will be followed." (Emphasis added). See First National Bank v. Port Arthur, 35 S.W.2d 258 (Tex. Civ. App. 1931, n.w.h.). Since it is the customary business and accounting practice for institutional mortgage investors to contract with mortgage bankers for servicing of their investments, we find that the above named agencies may so contract. Each Fund has been created pursuant to separate con- stitutional and statutory provisions. Each Fund has a separate set of statutes relating to its accounting aspects. Each controlling agency has a certain degree of discretion as to the investment of each Fund. See Attorney General's Opinion No. C-70LI(June 7, 1966). Therefore, this office does not deem it appropriate to approve any single contract form for use by all agencies. We recommend that future ser- vicing contracts be submitted to this office for approval prior to execution. In answer to your second question, it is our opinion that the Board of Regents of the University of Texas, the State Board of Edu.cation,the State Board of Trustees of the ,EmployeesRetirement System and the State Board of Trustees of the Tea&m Retirement System have the author- ity to contrazt w:ithcorrespondents in various sections of Texas for the servicing of FHA insured first lien mort- gage loans.

-x313- Honorable Preston Smith, page 11 (C-793)

SUMMARY --m--m- FHA Insured first lien mortgages are eligible Investments for the Per- manent University Fund of the University of Texas. The Board of Regents of the University of Texas, the State Board of Education, the State Board of Trustees of the Employees Re- tirement System and the State Board of Trustees of the Teacher Retirement System have the author- ity to contract for the servicing of FHA ln- sured first lien mortgages; however, we recom- mend that future servicing contracts be submitted to this office for approval prior to execution. Respectfully submitted, ' WAGGONER CARR Attorney General of Texas

RCF:vg APPROVEDr OPINION COMMITTEE Ralph R. Rash, Chairman M. Paul Martin John W. Fainter, Jr. Mark W. White APPROVED FOR THE ATTORNEY GENERAL By: T. B. Wright

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