Untitled Texas Attorney General Opinion ( 1958 )

E 0 Y GENERAL
OF EXAS
AUSFN II. TExas
WVILL WILSON
AlTORNEYGENERAL August 5, 1958
Hon. Leroy Jeffers, Chairman Opinion No. WW-484
The Board of Regents
The University of Texas Re: The authority of the Board of
Esperson Building Regents of The University of
Houston 2, Texas Texas to invest the Permanent
University Fund in first lien
real estate mortgage securities,
to contract with correspondent
loan agents in various sections
of Texas for the servicing of such
loans, and to pay such costs as are
incidental to a program of this na-
ture.
Dear Mr. Jeffers:
Your request for an opinion states, in part, that
“The University of Texas contemplates entering in contracts
with mortgage loan correspondents in various sections of
Teyas, and in these contracts the correspondents, among
other things, will agree to furnish the following services:
1. Collection of principal and interest as it matures;
2. Collection of requim reserves for the payment of ’
accruing ad valorem taxes against the mortgaged
property; future hazard insurance premiums and
future FHA insurance premiums;
3. Maintenance of detailed records of all payments
made by borrower and of all disbursements out of
reserve accounts;
4. Payment of all ad valorem taxes against mortgaged
property as they become due;
-
Hon. Leroy Jeffers, page 2, WW-484
5: Payment of all premiums for hazard insurance on
mortgaged,‘property as they become due;
6. Payment of FHA insurance premium as it becomes
due;
‘f. Makqa report on all delinquencies which may occur;
8. Secure and properly check renewal hazard insurance
policies;
9. Make an annual inspection of peach mortgaged property
with a report to the University;
lQt Supervise and ass+ tba University in the event of any
required foreclosure proceedings;
11. When necessary, manage for tire kouit of the Univer-
sity any ,forecloaed properties;
I
12. Render full assistance to the Untvarnity in the delivery
of the foreclosed property to FHA in exchange for deben-
tures.
The Unlvereity will not pay tn excess of the standard current
rate for these servicer, rendered by correspondents. This
rate is currently l/2 of 1% annually on the declining princi-
pal balance, payable only when interest is collected, which
wfll be withheld from the income normally deposited to the
Available University Fund.’
and closes with the following question:
*Does The University of Texas have the autbority to contract
with correspondents in various sections of Texas for the ser-
vicing of first lien mortgage loans and pay such costs as are
incidental to a program of thie nature in fulfilling the require-
ments of Sectton lla of Article 7 of the Constitution?”
The items numbered 2, 6 and 12 in y,our question imply that the fir’st lten
mortgage loans inquired about will be insured by mpayment of FHA insur-
ance premium as it becomes due.’ Upon further inquiry we are informed
.
Hon. Leroy Jeffers, page 3. WW-484
that your question contemplates only those mortgages which are insured
by the Federal Housing Administration under Section 203 of the National
Housing Act. as amended, and this opinion is li’mited to such mortgages.
The basic question presented is whether or not such an invest-
ment of the Permanent University Fund is one permitted by the following
language of Section lla of Article VII of the Constitution of Texas:
”
. . ., the Permanent University Fund may be invested
in first lien real estate mortgage securities guaranteed
in any manner in whole by the United States Government
or any agency thereof. . .:-
:*Are such mprtgages ‘guaranteed . . . in whole” as so required?
.’
The National Housing Act, codified as 12 U.S.C.A., Sets. 1701. jet
seq.. and hereinafter referred’to as the “Act,” as enacted and amended many
times by Congress. is very voluminous. To the law has been added many
hundreds of rules, regulations and procedures prescribed by the Federal
Housing Commissioner, who is empowered to administer the Act.
To quote verbatim Section 203 and all of the many lengthy subse-
quent sections of the Act pertaining to these mortgages, would unduly pro-
long this opinion. It will suffice here to quote briefly from the Act and ,from
an official publication of rules. and regulations of the Federal Housing Com-
missioner entitled ‘FHA Mortgagee’s Handbook,” consisting of 1,510 num-
bered paragraphs, to which we will refer as the “Handbook.”
In determining whether the “insurance” of such mortgages by FHA
is sufficient to render them “guaranteed . . . in whole” for the benefit of the
Permanent University Fund, it should first be noted~ that the following appears
in the Act in Section 203:
4s
. . .
“(b) To be eligible for insurance under this section a mort-
gage shall -
(1) have been made:to, and be held by, a mortgagee ap-
proved by the Commissioner as responsible and abIe
to service the mortgage properly.
a. . . . n
.
Hon. Leroy Jeffera, page 4, WW-484
Assuming that such approval would be forthcoming and the
Fund ia invested in such a mortgage, what ia the protection afforded to
the Permanant University Fund by FHA in event of default and when it be-
comes necessary to foreclose?
Section 1102 of Chapter XI of the Handbook, entitled “Pro-
cedures after Default,’ atatea, in part:
*AU approved mortgagaaa are required to service
insured mortgages in accordance with practices acceptable
to prudent lending institutiona. It is expected that in the
event of default the mortgagee will be able to communicate
readily with the mortgagor and will exercise diligence in at-
tempting to obtain payment in accordance with the terms of
the mortgage. Proper servicing of the mortgage is, of
course, the responsibility of the mortgagee and is not a
function to be assumed by FHA inauring offices . . **
Thus, it is apparent that it would be the duty of the mortgagee
(the University) to ‘service” the mortgage and to bear the expensea of at-
tempting to collect delinquent monthly installment payments owed ~:by the
mortgagor, and to defray the coats and expenses incident to foreclosure pro-
ceadings, among other things.
How much of the,se coats and expenses are to be borne by the
‘correspondent’ mortgage banker who ‘currently” would receive l/2 of 1%
annually on the declining principal balance for the lervicea apacifically
enumerated in the request for our opinion, and how much would be borne
by the Permanent University Fund 7
The twelve itema lirtad in the requeat indicata that the Fund
would bear all costa and expenrer of collecting delinquent installment pay-
manta (Itim 1 covers only the collection of principal and intareat *aa it
maturer*). Itama 10, 11, and 12 clearly ahow that the University would coa-
duct and pay the coata and expenses incident to foreclosure and conveyance
of the foreclosed property to FHA (the correspondent mortgage banker Oauper-
vlalng and aaaisting”)r and whennecessary the Unlveralty would pay the cor-
reapondent mortgage banker an unatated amount to manage any foreclosed
properties (*for the account of the University’ we take to mean *at the ex-
pexae of the University*).
Hon. Leroy Jeffers, page 5, WW-484
This interpretation of items 10 and 12 clearly follows from
the language used and is consonant with general law in that most of the
necessary steps in:foreclosure and in delivering the foreclosed property
to FHA in exchange for debentures constitute the practice of law and may
not lawfully be performed for a fee by a correspondent mortgage banker
not licensed as an attorney.
-If the mortgagee forecloses and takes possession of the’
mortgaged property in a manner satisfactory to
-- the Commissioner, and
if such property is conveyed to the Commissioner promptly in a manner,
satisfactory to him, the mortgagee is entitled to receive payment of the
FHA “insurance ” in a combination of FHA debentures, cash up to $50.00,
and a “Certificate of Claim.” No time limit is imposed upon the Commis-
sioner as to when this transaction shall be consummated, and the mortgagee
is to receive this relief.
This procedure is outlined in Section 204 of the Act, as f.ol-
lows:
*Sec. 204. (a) In any case in which the ,mortgagee
under a mortgage ins,ured under section..203 shall
have foreclosed and taken possession of the mort-
gaged property in accordance with regulations of,
and within a period to be determined by, the Com-
missioner, or shall, with the consent of the Commis-
sioner, have otherwi8.e acquired such property from
the mortgagor after default, the mortgagee shall be
entitled to receive tha benefit of the insurance as
hereinafter provided, upon (1) the prompt conveyance
to the Commissioner of title to the property which
meets the requirements of rules and regula,tions 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 mortgagor 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 convay-
ante and assignment 0.e&e Commissioner shall,..r-
issue to the mortgagee debentures having a total face
value equal to the value of the mortgage and a certifi-
cate of claim, as hereinafter provided. For the
.,.
Hon. Laroy Jeffers, page 6, WW-484
purposes of this subsection, the value of the
mortgage shall be determined, in accordance
with rules ,and regulations prescribed by the
Commissioner, 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 mortgage, special assess-
ments which are noted on the application for insur-
ance or which become liens after the insurance of
the mortgage, insurance on the mortgaged property,
and any mortgage insurance premiums paid after
_either of such dates, 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 account of the mortgage after either of
such dates, and any amount received as ,rent or other
income from the property, less reasonable expenses
incurred in handling the property, after either of
suc#h dates . . .”
Y . . . And provided further . . . with respect to any
mortgage accepted for insurance under section 203 . . .
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 such cost or
$75 whichever is the greater I . .R (Emphasis added)
It should be noted in the above quotation from the Act that the
‘value of the mortgage ” is to be determined “in accordance with rules and
regulations prescribed by the Commissioner” by applying the formula given.
FHA debentures having a total face value equal to this “value of the mortgage,”
plus an allowance (which never exceeds $75.00) on mortgagee’s foreclosure
expenses, or other expenses of acquiring the property, are then issued to the
mortgagee.
Hon. Leroy Jeffers, page 7, WW-484
It should be stated here that these FHA debentures are not
worth their face value on the present market but may be sold at this time
only at a heavy discount from such face value. Further, Section 204 (d)
of the Act provides that the debentures shall bear interest *at a rate de-
termined by the Commissioner” but-never to exceed ‘3 per centum per
annum, ” whereas the original mortgage bore interest at the rate of five
(5) per cent. Also, such debentures “shall mature twenty years after the
date thereof.”
That the total face value of the debentures, plus the “cash sd-
justment’, may not be sufficient to make the mortgagee whole is very evi-
dent from ~the following quotation from Section 204(e) of the act:
..
“The certificate of claim issued by the Commissioner
to any mortgagee shall be for an amount which the Com-
missioner determines to be sufficient, when added to
the face value of the debentures issued and the cash ad-
justment paid to the mortgagee, to equal the amount which.
the mortgagee would have received if, at the time of the
conveyance to the Commiss,ioner. of the property covered
by the mortgage, the mortgagor had redeemed the property
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 proceed-
ings, or the acquisition of the mortgaged property other-
wise, and the conveyance thereof to the Commissioner. . .”
It is obvious that issuance and payment of the *Certificate of
Claim” may be necessary, in addition to the debentures and the “cash adjust-
ment. ” in order to place the mortgagee University in the position it would
have been had the mortgagor fully discharged its obligations under the mort-
mre-
But neither the FHA nor. anyone else is bound to pay this ‘Cer-
tificate of Claim.” It may be paid in full, it may be partially paid, or it may
never be paid at all.’ Collection of this Certificate by the University mortgagee
depends entirely upon the results of the sale of the mortgaged property by the
Commissioner, when and if it is sold. If the proceeds of such sale, which is
conducted solely by the Commissioner under his rules and regulations, produces
an excess after certain charges, deductions and expenses are subtracted, then
such excess may be used to pay, or partially pay, the Certificate of Claim. In
any event, the Certificate is eventually subject to “voidance and termination”
Hon. Leroy Jeffers, page 8, WW-484
by the Commlarionrr, (goctlon 204(f) of the Act. and portlonr of tho Hand-
book quotod bolow)
Scetton 1125 of tko Handbook makes this ststkiwat:
“The mrtiflaato of
claim ia irauod aa af the date of
convoyanas of title to tbhc FHA in an ameunt auffi-
cient to ctqusl roll amounts due under tko mavtg&++
ivat fkh4l hy the remount 130the dihkntuiee, , . ‘7
And Section 1154 dsscriba$ the fate of the “Gertiflstrte ef Clatm” in thle
‘I h8Ull80 :
"Tha aarttficatr of claim rhrrll becume void and of
no’ offect (a) qpon the payment of euch eaaaa~ aa
prsvldad abavy: (whothrr it liquldrtap the certlfteak,
in part or La full), or (b) upon tha friluro of thr Com-
mi&sLonrr to rralho any rxaraa upon tho full ltquida-
tion of the proprrty, Upon the llquldotion of the prop-
rrty the CommLarLonrr shall notlfy thr rrglatorad
holder of tho cartlflcrta by mail at tho port office
nddrona an shown by tho rocordr of tho CommLorionor,
~of tho dlrporitlon of the procoodr and pf the SoLdnnco
and tormlnation of tho cortlflcato of claim,” v
Although the Toxar courtr have not construed the phraao
“guaranteed . , . Ln whole” , we view its meaning as too plain to require.
construction. The ordinary meaning of the word “guarantee” is that
some ono else la primarily liable for a debt and that the guarantor will
.
pay it lf the primary debtor doer not. Charleston Five Cents Savlnga v.
Wolf, 36 N.E.2d 390, 392; 309 Mesa. 547. And the word “whole”, as de-
tined in Websbx’s New International Dictionary, Unabridged. 1957, at
page 2,921, means “contahing all lta conatttutent or lntogral parts or ale-
mente; having nothing lacktng or taken away; full; entire.”
We conclude that tho mortgages inquired about are not “guaran-
teed . . . ln whole” for the reason that the~mortgagao Unlver,alty may never
co,llect Ln monoy all that it 1s entitled to collect under the mortgage ltaelf.
,While the FHA insurance arrangement may pay a major portlon of the Univer-
sity’s loss, and in times of economic prosperity may pay It all, there Is no
~‘guarantee” of this and such mortgages do not satisfy this constitutional re-
quirement.
Hon. Leroy Jeffera, page 9, WW-484
If in the future the National Housing Act is amended, so
as to provide such a *guarantee’, then it should be noted that the Board
of Regents may not exceed certain limitations in authorizing expenditures
for administering the Permanent University Fund. The acquisition, servic-
ing and liquidation of such mortgages would be included in such administra-
tive expenses. These limitations are contractually imposed in certain bond
resolutions authorizing the issuance of outstanding bonds of the Permanent.
University Fund. For example, on page 13 of the bond resolution authoris-
ing the Board of Regents of the University of Texas Permanent University
Fund Refunding Bonds, Series 1958, in the amount of $5,076,000.00, there
appears the following:
“16. That the Board of Regents of the University
of Texas covenants and agrees as follows:
. . .
*(b) That it will restrict expenditures for adminls-
tering the Fund to a minimum consistent with pru-
dent business judgment and that such expenditures,
chargeable before debt service requirements, shall
never exceed in any year an amount equal to l/5 of
1% of the book value of the Permanent University
Fund.”
SUMMARY
,The first lien real estate mortgage securities inquired
about are not guaranteed. fu whole as. rF@irtid by Sectban
lla of Article VII of the Constitution of Texas and are
not eligible as an investment of the Permanent Univer-
sity Fund of the University of Texas.
Very truly yours
HWM-s
WILL WILSON
APPROVED:
OPINION COMMITTEE
Geo. P. Blackburn, Chairman
Grundy Williams Assistant- /
J. Milton Richardson
Morgan Nesbitt
Henry G. Braswell :
REVIEWED FOR THE ATTORNEY GENERAL
By: W. V. Geppert