NEP GENERAL 

EXAS 

Honorable Preston Smith 

Lieutenant Governor 

State of Texas 

Austin, Texas 

Opinion No. C-793 

Re: Eligibility of FHA 

insured first lien 

mortgages as investments ,for the Permanent University 

Fund of the University 

of Texas, and the authority of the Board of Regents of the University 

of Texas, the State 

Board of Education, the 

State Board of Trustees 

of the Employees Retirement System and the 

State Board of Trustees 

of the Teacher Retirement 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 Administration (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." 

-3804- 
. 

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

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 answered in order. 

"(1) ARE FHA INSURED FIRST LIEN REAL 

ESTATE MORTGAGES NOW ELIGIBLE AS AN INVESTMENT 

FOR THE PERMANENT D TH E UNIVERsTTY 

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 "guaranteed 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 shallexercise the judgment and care under the clrcumstances then prevliling which men of ordinary 

prudence, discrct$on and intelligence exercise 

in the management of their own affairs not in 

regard to speculation but in regard to the 

permanent disposttion of their funds, considering 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,t University 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 Constitution affected by the adoption of Article 

7, Section 11(a) was to increase the permissive 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 portfolio." 

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,conclusion in 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 required when a mortgage has been foreclosed. Those portions 

will again be quoted with the relevant changes thereto emphasized: 

"(a) I:n any 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 provided, 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 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 

conveyance and assignment . . . the Commissioner 

shall, subject to the cash adjustment herelnafter provided, issue to the mortgagee debentures having a total face value equal to the 

value of the mortgage and (subject to subsection (e) (2) of this section) a certificate of claim, as hereinafter provided. For 

the purposes of this subsection, the value of 

the mortgage shall be determined, in accordance 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 mortgage, 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 reasonable expenses incurred in handling the property, after ei,ther of such dates 

And provided further, That with respect ;o 

mortgages whi.ch are accep,ted for 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 twothirds of s.uch cost or $75 whichever is the 

greater: And provided further, That with respect to a mortgape accepted for insurance pursuant to a commitment issued on or after September 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 provided further, That where the claim'is paid in 

-.-,. zn there shall be included in the cash p 

ment 

I_~ ayan amo,un,t egui,valent to the compensation 

for loss of debenture interest that would be 

included in computing debentures if suchim 

were being paid in debentures . . . .'I 12 zT.S.C., 

Section 1710(a) (Kmpk,asis added). 

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 combination of (1) .FHA debantures, (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~l race 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 mortgagee, to equal the amount which the mortgagee 

would have received if, at the time of the conveyance to the Commissioner 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 proceedings, or the acquisition 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 subsection shall not be applicable in the case of a 

mortgage accepted for insurance pursuant to a commitment issued on or after September 2, 1964." 

-(Emphasis added). 

Further, the FHA regulations provide: 

I 

"If the mortgage was accepted for insurance 

pursuant to a commitment issued on or after September 2, 1964, no certificate of claim shall be 

issued.' 211 C.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 authorized, 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: 

The 

the 

10, 

"If the application for insurance benefits is acceptable to the Commissioner, payment 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. 

present policy of the FHA is found in a letter from 

Commissioner to all approved mortgagees dated August 

1965 (65-g) that says on pages 5 - 6: 

"FHA is now authorized to settle all 

mortgage insurance claims in cash or debentures at the option of FHA. All claims received on and after September 1, 1965, will 

be paid in cash, unless the mortgagee specifically 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 debenture rate, on the amount of the settlement. 

No cash remittances are to be made to FHA 

covering escrow deposits, undisbursed mortgage 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,,mortgagee elect to accept debentures, the 

debentures are 

as to principal and &cerest by the United States 

fully and unconditionally guarantee: 

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 

24 C.F.R., ;: 

years from the date of issuance. 

Section 203. 06. 

The mortgagee now has ,the option 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 certificates of claim have been abolished by Congress. FHA insured 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- 

-3811- 
Honorable Preston Smith, page 9 (c-793) 

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,ticle 62!28a, Section 

7A, V.C.S. 

,,t;k! 

eat 

ika::dn4t: h 

er Retirement Fund. Article III, 

A&icle 2922-1, 

b of the Constitution of Texas and 

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,th administration and control of 

each Fund) to c0ntrac.F: f'or servicing of mortgages is not expressly provided by sta.t%.:.te. There is, however, no statutory 

prohibition. 

In Attornev Generalvs Gninion No. W-69, supra, it was 

said with refer+znce to a proposed procedure for the purchase 

and sale of corporate securities for the Permanent University 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 payment 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 business and accounting practice and the constitutional provision infers that the customary business 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 constitutional 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. 

Opinion No. 

See Attorney General's 

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 servicing 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 ,Employees Retirement System and the State Board of 

Trustees of the Tea&m Retirement System have the authority to contrazt w:ith correspondents in various sections 

of Texas for the servicing of FHA insured first lien mortgage loans. 

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

SUMMARY --m--mFHA Insured first lien mortgages 

are eligible Investments for the Permanent 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 Retirement System and the State Board of Trustees 

of the Teacher Retirement System have the authority to contract for the servicing of FHA lnsured first lien mortgages; however, we recommend 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 

-3814-