E 0 Y GENERAL 

OF EXAS 

AUSFN II. TExas 

WVILL WILSON 

AlTORNEYGENERAL August 5, 1958 

Hon. Leroy Jeffers, Chairman 

The Board of Regents 

The University of Texas 

Esperson Building 

Houston 2, Texas 

Opinion No. WW-484 

Re: The authority of the Board of 

Regents of The University of 

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 nature. 

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 University any ,forecloaed properties; 

I 

12. Render full assistance to the Untvarnity in the delivery 

of the foreclosed property to FHA in exchange for debentures. 

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 principal 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 servicing of first lien mortgage loans and pay such costs as are 

incidental to a program of thie nature in fulfilling the requirements 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 insurance 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 investment 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 subsequent sections of the Act pertaining to these mortgages, would unduly prolong 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 Commissioner entitled ‘FHA Mortgagee’s Handbook,” consisting of 1,510 numbered 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 mortgage shall - 

(1) have been made:to, and be held by, a mortgagee approved 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 becomes necessary to foreclose? 

Section 1102 of Chapter XI of the Handbook, entitled “Procedures 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 attempting 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 attempting to collect delinquent monthly installment payments owed ~: by the 

mortgagor, and to defray the coats and expenses incident to foreclosure proceadings, 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 l ervicea 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 paymanta (Itim 1 covers only the collection of principal and intareat *aa it 

maturer*). Itama 10, 11, and 12 clearly ahow that the University would coaduct and pay the coata and expenses incident to foreclosure and conveyance 

of the foreclosed property to FHA (the correspondent mortgage banker Oaupervlalng and aaaisting”)r and whennecessary the Unlveralty would pay the correapondent mortgage banker an unatated amount to manage any foreclosed 

properties (*for the account of the University’ we take to mean *at the expexae 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 Commissioner as to when this transaction shall be consummated, and the mortgagee 

is to receive this relief. 

lows: 

This procedure is outlined in Section 204 of the Act, as f.ol- 

*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 mortgaged property in accordance with regulations of, 

and within a period to be determined by, the Commissioner, or shall, with the consent of the Commissioner, 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 convayante and assignment 0.e&e Commissioner shall,..rissue to the mortgagee debentures having a total face 

value equal to the value of the mortgage and a certificate 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 assessments which are noted on the application for insurance 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 determined 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 sdjustment’, may not be sufficient to make the mortgagee whole is very evident 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 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 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 proceedings, or the acquisition of the mortgaged property otherwise, 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 adjustment. ” in order to place the mortgagee University in the position it would 

have been had the mortgagor fully discharged its obligations under the mortmreBut neither the FHA nor. anyone else is bound to pay this ‘Certificate 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 Handbook 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 aufficient to ctqusl roll amounts due under tko mavtg&++ 

ivat fkh4l hy the remount 130 the 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 Commi&sLonrr to rralho any rxaraa upon tho full ltquidation of the proprrty, Upon the llquldotion of the proprrty 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 detined in Websbx’s New International Dictionary, Unabridged. 1957, at 

page 2,921, means “contahing all lta conatttutent or lntogral parts or alemente; having nothing lacktng or taken away; full; entire.” 

We conclude that tho mortgages inquired about are not “guaranteed . . . 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 University’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 requirement. 
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, servicing and liquidation of such mortgages would be included in such administrative 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 authorising 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 adminlstering the Fund to a minimum consistent with prudent 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.” 

HWM-s 

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 University Fund of the University of Texas. 

Very truly yours 

WILL WILSON 

APPROVED: 

OPINION COMMITTEE 

Geo. P. Blackburn, Chairman 

Grundy Williams 

J. Milton Richardson 

Morgan Nesbitt 

Henry G. Braswell : 

Assistant- / 

REVIEWED FOR THE ATTORNEY GENERAL 

By: W. V. Geppert