[Link to GHM-0004 (Index
3.400)](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0004LOPS.doc)

Refunding of Tax-Exempt Multifamily Revenue Bonds

Legal Opinion: GHM-0069

Index: 3.400

Subject: Refunding of Tax-Exempt Multifamily Revenue Bonds

February 1, 1993

MEMORANDUM FOR: Philip J. Salamone, Deputy Assistant Secretary

Multifamily Housing Programs, HM

FROM: John J. Daly, Associate General Counsel

Insured Housing and Finance, GH

SUBJECT: Handbook 4350.1, Chapter 15, \"Refunding of Tax-Exempt

Multifamily Revenue Bonds\"

The purpose of this memorandum is to bring to your attention

certain ambiguities in a multifamily handbook which have caused

confusion as to the authority of Field staff to approve bond

refunders.

The source of this confusion is Chapter 15 of

HUD Handbook 4350.1 REV-1, 9/92, \"Refunding of Tax-Exempt

Multifamily Revenue Bonds,\" (the \"Handbook\"). Paragraph 15-2.a)

of the Handbook permits the Director of the Housing Management

Division in HUD Field Offices to approve refunding of tax-exempt

bonds for insured projects where \"the project is financially

troubled as evidenced by a notice of default, financial statement

demonstrating the project\'s inability to make debt service

payments, or analyses revealing significant physical improvement

needs beyond the availability of the project\'s cash flow\....\"

Paragraph 15-3.a) provides that Chapter 15 covers only bond

refunders for projects \"which are in default under the mortgage.\"

The latter paragraph seems to conflict with the former since

paragraph 15-2.a) includes in its definition of \"financially

troubled\" projects, those which are current under the mortgage,

but which require significant physical improvements.

In addition, paragraph 15-2.b) excludes from Chapter 15,

\"other bond transactions involving current loans, defeasance of

existing bonds, etc.\" No guidance is provided as to which

current loans cannot be approved by the Field Offices or what

\"defeasance of existing bonds, etc.\" means.

Paragraph 15-3.c) provides that \"this chapter does not cover

Section 8 financing Adjustment Factor (FAF) refundings; 103(b) or

11(b) refundings or non-FAF advance/current refundings.\" Since

all tax exempt refundings involve either Section 103(b) or 11(b)

bonds, the exception would seem to override, in its entirety, the

authority granted, in paragraph 15-2.a), to the Field Offices.

However, it is our understanding that paragraph 15-3.c) was

intended to exclude from the authority granted to the Field

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Offices in paragraph 15-3.a) only tax-exempt refundings involving

projects that have project-based Section 8 assistance, regardless

of whether FAF is involved. In addition, as currently drafted,

the authorization would appear to include default refundings

where GNMA holds the mortgage and is resecuritizing mortgage

backed securities.

In at least one instance, this ambiguous language has

resulted in a Field Office approving a bond refunder which it did

not have authority to approve. Holly Creek Apartments has an

insured 221(d)(4) mortgage, which is current, and two Section 8

contracts. The Director of the Housing Management Division in

the Houston Office approved the bond refunder on October 20, 1992

and forwarded the Modification to the Note to Field Counsel.

Field Counsel forwarded the Modification to Regional Counsel who

apparently approved it without even knowing that a bond refunding

was part of the transaction. The mortgagee for Holly Creek had

intended to close the refunding by January 29, 1993 and was not

aware that the Houston Office\'s approval was not authorized. The

mortgagee is threatening to sue the Department if this

transaction is delayed and he suffers damage due to that delay.

Because the ambiguous language of Chapter 15 is obviously

causing some confusion which could result in litigation against

the Department, we strongly recommend that the Office of Housing

provide Field Offices with a clarification of the scope of their

authority to approve bond refunders. My staff is available to

assist in developing the content of the clarification.

In addition, we are interested in meeting with you, or your

representatives, to discuss the role of Field Counsel in

reviewing and approving legal documents connected with bond

refundings. In Appendix 3 of Chapter 15, a letter from the

Director of Housing Management to the mortgagee authorizing the

bond refunder, states that \"HUD Field Counsel will provide you

with further instructions about the necessary documents and other

closing requirements.\" It seems that the extent of Field

Counsel\'s review and the types of documents that must be reviewed

appear to vary depending on the type of transaction (FAF

refunder, or project-based Section 8 project), whether the

mortgage is current or in default, insured or held. We would

like to discuss this matter with you prior to advising Field

Counsel and developing written guidance. Please let me know when

it would be convenient for us to meet.