October 21, 2003

Index Number: 3.180/3.335 CIM-0127

Subject: Section 541(b) Payments in Coinsured Mark-to-Market
Restructurings

MORANDUM FOR: Charles H. Williams, Director, Office of Multifamily

Housing Assistance Restructuring, HY

FROM: John J. Daly, Associate General Counsel for Insured Housing, CI

SUBJECT: Section 541(b) Payments in Coinsured Mark-to-Market
Restructurings

Your memorandum to me dated June 24, 2003 requests legal guidance
regarding FHA\'s legal authority to make a Section 541(b) payment on
behalf of the owner/mortgagor of a project mortgage securing a note
endorsed for coinsurance under the National Housing Act. Specifically,
the Massachusetts Housing Finance Agency, a co-insurance mortgagee, has
a portfolio of approximately a dozen projects eligible for
restructurings in the Mark-to-Market (M2M) Program which have coinsured
mortgages. Some of these projects are reaching the point where OMHAR
would be able to issue a Restructuring Commitment, but this would only
be feasible if there is statutory authority for FHA to make a Section
541(b) payment to the coinsured mortgagee. Representative of this
portfolio of coinsured projects is Granite Package #5 Blue Mountain, FHA
Project #023-36609, which has a co-insured Section 221(d)(4) mortgage
with an unpaid principal balance of approximately \$9,000,000.

When it created the Mark-to-Market program Congress provided the
Secretary with certain mortgage restructuring tools, the most important
of which is the authority set out in Section 541(b) of the National
Housing Act for the Secretary to \"make a one time, non-default partial
or full payment of claim under one or more mortgage insurance
contracts.\" One of the stated legislative purposes of the
Mark-to-Market program as set out in Section 511(b) of MAHRA is \"to
reduce the cost of insurance claims under the National Housing Act
related to mortgages insured by the Secretary and used to finance
eligible multifamily housing projects.\"

Section 244 was added to the National Housing Act by Section 307 of the
Housing and Community Development Act of 1974 and authorizes the
Secretary to insure mortgages otherwise eligible for mortgage insurance,
pursuant to a coinsurance contract with an approved mortgagee, if the
mortgagee will assume a percentage of any loss; and will carry out
credit approval, appraisal, commitment, inspection, management
oversight, servicing, and property disposition. Section 244(a) provides
in pertinent part that:

\[T\]he Secretary, upon request of any mortgagee . . . may insure and
make a

> commitment to *insure under any provision of this title* (emphasis
> added) any mortgage, advance, or loan otherwise eligible under such
> provision, pursuant to a co-insurance contract that the mortgagee will
> \-- (1) assume a percentage of any loss on the insured

mortgage, advance, or loan in direct proportion to the amount of the
co-insurance.

Section 244 authorizes the Secretary to insure a mortgage under any
section of the National Housing, it does not have its own insuring
authority. Consequently, when the Secretary endorsed a mortgage for
coinsurance, the mortgage was actually providing insurance under either
Sections 221(d)(3)/(4) or Section 207 pursuant to Section 223(f). This
is evidenced by the endorsement panel on the insured note which for
projects in the Mark-to-Market program would have read as follows:
\"co-insured under Section 221(d)(3)/(4) pursuant to Section 244 of the
Act,\" or coinsured under Section 207 pursuant to Section 223(f) and
Section 244 of the Act.\" The endorsement panel language demonstrates
that the insurance authority applicable to that mortgage note was
pursuant to a coinsurance arrangement between the Secretary and an
approved mortgagee that was entered into under the authority in Section
244 of the National Housing Act. The legislative history for Section 244
provides no evidence that Congress intended for the coinsurance of
mortgages to be anything other than a mortgage insurance program under
Title II of the National Housing Act.

In view of the foregoing, loans insured pursuant to Section 244 are
loans insured under the National Housing Act. It is, therefore, our
opinion that the Secretary is authorized to make a Section 541(b)
non-default payment of claim to a coinsurance mortgagee on a mortgage
insurance contract, under either Section 221(d)(3)/(4) pursuant to
Section 244, or Section 207 pursuant to Section 223(f) pursuant to
Section 244, on behalf of a mortgagor participating in the
Mark-to-Market program. Further, we believe that 24 CFR 251.3 is not
applicable to the Mark-to-Market program because the requirement in
251.3(b) that the \"lender has made reasonable efforts to work out any
Mortgage default\" makes clear that the regulation, as drafted, was
intended to apply to those situations when a mortgagor is in default
under the terms of its coinsured note and mortgage, and that is not the
case relative to a project undergoing a mortgage restructuring in the
Mark-to-Market program.

If you have any questions concerning this legal opinion, please contact
Edward Ferguson at 708-4107.

Daly-9228

Potts-9228

Ferguson-9236

Chron.-9228

Dec.File§268.0-9228

Acorn #378961

EMF:emf 708-4107 9-25-03 J:CoinsuredM2M.rev3.doc