## E 0 Y GENERAL OF EXAS AUSFN II. TExas WVILL 

### WILSON AlTORNEYGENERAL August 5, 1958
Hon. Leroy Jeffers, Chairman The Board ofRegents The University of Texas Esperson Building Houston 2, Texas Opinion No. WW-484 Re: The authority ofthe Board 

### of Regents of The University of Texas to invest the Permanent University Fund infirst lien real estate mortgage securities, to contract with correspondent loan agents invarious sections of Texas for the servicing of such loans, and to pay such costs as are incidental to a program 

### ofthis nature. Dear Mr. Jeffers:

**Your** request for an opinion states, in part, that “The University ofTexas 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 ofprincipal 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 ofall payments made by borrower and of all disbursements out of reserve accounts; 4. Payment ofall 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 ofFHA insurance premium as itbecomes due;

‘f. Makqa report on all delinquencies which may 

### occur; 8. Secure and properly check renewal hazard insurance policies; 9. Make an annual inspection ofpeachmortgaged 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** ofthe University any ,forecloaed properties; I 12. Render full assistance tothe Untvarnity inthe delivery ofthe foreclosed property to FHA in exchange for debentures. The Unlvereity will not pay tnexcess ofthe standard current 

### rate for these servicer, rendered by correspondents. This rate is **currently** l/2 of 1% annually onthe 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 

### paysuch costs as are incidental to a program of**thie nature**  infulfilling the requirements ofSectton lla of**Article** 7ofthe Constitution?” The items numbered 2, 6and 12in

### y,ourquestion imply that the fir’st lten mortgage loans inquired about will be insured by mpayment ofFHA insurance premium as itbecomes 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 ofthe 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 ofArticle VII ofthe Constitution of Texas:

”

. . ., the Permanent University Fund may be invested in first lien real estate mortgage securities guaranteed in any manner inwhole by the United States Government or any agency thereof.
. .:- :*Aresuch mprtgages ‘guaranteed
. . . inwhole” as so required?

.’ The National Housing **Act,** codified as 12U.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 ofrules, regulations and procedures prescribed by the Federal Housing Commissioner, who is empowered to administer the**Act.**

To quote verbatim Section 203and all ofthe many lengthy subsequent sections of the**Act** pertaining to these mortgages, would unduly prolong this opinion. Itwill suffice here toquote briefly from the Act and,from an official publication 

### ofrules. and regulations ofthe Federal Housing Commissioner entitled **‘ FHA**  **Mortgagee ’** **s** Handbook,” consisting of 1,510 numbered paragraphs, towhich we will refer as the “Handbook.”

In determining whether the “insurance” of such mortgages by FHA is sufficient to render them “guaranteed
. . .inwhole” for the benefit ofthe Permanent University Fund, it should first be noted~that the following appears inthe **Act** inSection 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 

### amortgage, what ia the protection afforded to the Permanant University Fund by FHA in event of default and when itbecomes 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 inthe 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 ofthe mortgage is, of course, the responsibility ofthe mortgagee and is not a function to be assumed by FHA inauring offices
. . **

Thus, it is apparent that itwould be the duty ofthe mortgagee (the University) to ‘service” the mortgage 

### and tobear 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 ofthe,se coats and expenses are tobeborne bythe

‘correspondent’ mortgage banker who ‘currently” would receive l/2 

### of 1% 

### annually onthe 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 1covers only the collection ofprincipal and intareat *aa it maturer*). Itama 10, 11,

### and 12clearly ahow that the University would coa

### duct andpay the coata and expenses incident to foreclosure and conveyance 

### ofthe 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 ofthe University’ we take to mean *at the expexae of the University*).Hon. 

### Leroy Jeffers, page 5,WW-484

This interpretation of items 10and 12clearly follows from the language used and is consonant with general law inthat most ofthe necessary steps in:foreclosure and in delivering the foreclosed property to FHA in exchange for debentures constitute the practice oflaw 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 ofthe’ - mortgaged property in a manner satisfactory to the Commissioner, and -- if such property is conveyed tothe Commissioner promptly in a manner, satisfactory to him, the mortgagee is entitled to receive payment ofthe FHA “insurance ” ina combination ofFHA debentures, cash up to $50.00, and a “Certificate of Claim.” No time limit is imposed upon the Commissioner as towhen this transaction shall be consummated, and the mortgagee is to receive this relief.

lows: This procedure is outlined inSection 204 of theAct, as f.ol-

*Sec. 204. (a) In any case inwhich the,mortgagee under a mortgage ins,ured under section..203 shall have foreclosed and taken possession ofthe mortgaged property in accordance with regulations of, and within a period to be determined by, the Commissioner, or shall, with the consent ofthe Commissioner, have otherwi8.e acquired such property from the mortgagor after default, the mortgagee shall be entitled to receive tha benefit ofthe insurance as hereinafter provided, upon (1) the prompt conveyance to the Commissioner oftitle to the property which meets the requirements ofrules 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 tohim ofall claims ofthe mortgagee against the mortgagor or others, arising out ofthe mortgage transaction or foreclosure proceedings, except such claims as may have been released with the consent ofthe 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 ofthis subsection, the **value** ofthe **mortgage** shall be determined, in accordance with rules ,andregulations prescribed by the Commissioner, by adding to the amount of the original principal obligation ofthe mortgage which was unpaid onthe date ofthe institution of foreclosure proceedings, or on the date of the acquisition ofthe 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 onthe 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 .bydeducting from such total amount any amount received onaccount ofthe 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#hdates
. . .” **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 onaccount of the cost of

### foreclosure (or ofacquiring the property by other means) actually paid by the mortgagee and approved by the

### Commissioner an amount, not in excess oftwo-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**  ofthe 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**  ofthe mortgage,” plus an allowance (which never exceeds $75.00) onmortgagee’s foreclosure expenses, or other expenses ofacquiring 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 onthe present market but may be sold at this time **only** at a heavy discount from such face value. Further, Section 204 (d) oftheAct 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 offive (5) per cent. **Also,** such debentures “shall mature twenty years after the date thereof.”

.. That the total face **value** ofthe debentures, plus the “cash sdjustment’, may not be sufficient tomake the **mortgagee** whole is very evident from ~thefollowing quotation from Section 204(e) ofthe act:

“The certificate of claim issued by the Commissioner to any **mortgagee** shall be for an amount which the Commissioner determines tobe 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. 

### ofthe property covered by the **mortgage,** the **mortgagor** had redeemed the property and paid infull 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 ofthe *Certificate of Claim” may be necessary, inaddition tothe debentures and the “cash adjustment. ” in order to place the mortgagee University in the position itwould have been had the mortgagor fully discharged its obligations under the mortmreBut neither the FHA nor.anyone else is **bound to**  **pay** this ‘Certificate ofClaim.” Itmay be paid in full, itmay be partially paid, or itmay never be paid at all.’ Collection ofthis Certificate by the University mortgagee depends entirely upon the results of the sale ofthe mortgaged property by the Commissioner, when and if it is sold. Ifthe 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 ofClaim. In any event, the Certificate is eventually subject to “voidance and termination”. 

### Hon. Leroy Jeffers, page 8,WW-484

by

## theCommlarionrr, (goctlon 204(f) ofthe

### Act.and portlonr ofthoHandbook quotod bolow)

Scetton 1125 of tko Handbook makes this ststkiwat: 

### “The 

## mrtiflaato ofclaim 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&++ 

### ivatfkh4l hy

### the remount 130 

### the dihkntuiee, , .‘7 

### And Section 1154 dsscriba$ the fate ofthe “Gertiflstrte efClatm” inthle ‘Ih8Ull80 

### : "Tha 

## aarttficatr ofclaim rhrrll becume void and of

no’ 

### offect (a) qponthe payment of euch eaaaa~ aa 

### prsvldad abavy: (whothrr 

### itliquldrtap the certlfteak, in part or Lafull), or (b) upon tha friluro ofthr 

### Commi&sLonrr to

### rralho any rxaraa 

### upon tho full 

### ltquidation 

### ofthe proprrty, Upon 

### the llquldotion of the 

### prop

### rrty the 

### CommLarLonrr shall notlfy thr rrglatorad holder ofthocartlflcrta by mail 

### atthoport office nddrona an shown by tho 

### rocordr of tho

### CommLorionor, ~of

### tho dlrporitlon ofthe procoodr and pf

### the SoLdnnco andtormlnation oftho cortlflcato of claim,” v Although the Toxar 

### courtr have not construed the phraao “guaranteed
. , . Lnwhole” ,we view its meaning as too plain to require. construction. The ordinary meaning of theword “guarantee” is that some ono else la primarily liable 

### for a debt and that the

### guarantor will pay it lfthe primary debtor 

### doer not. Charleston 

## Five CentsSavlnga 

## v. Wolf, 36N.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.”



## Weconclude that 

### tho mortgages inquired about are not “guaranteed
. . .lnwhole” 

### for the reason that the~mortgagao Unlver,alty may never co,llect 

### Lnmonoy all that 

### it 1sentitled to collect under the mortgage ltaelf. ,While the FHA insurance arrangement may pay a major portlon 

### ofthe University’s loss, and in times of economic prosperity may pay Itall, there Is no

~‘guarantee” 

### ofthis and such mortgages donot 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 ofRegents 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 ofthe Permanent. University Fund. For example, on page 13of the bond resolution authorising the Board ofRegents of the University of Texas Permanent University Fund Refunding Bonds, Series 1958, inthe amount of $5,076,000.00, there appears the following:

“16. That the Board ofRegents 

### of the University of Texas covenants and agrees as follows:

. . . *(b) That itwill restrict expenditures for adminlstering the Fund toa 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% 

### ofthe book value ofthe Permanent University Fund.”

HWM-s 

### SUMMARY

,Thefirst lien real estate mortgage **securities** inquired about 

### are not **guaranteed.** fuwhole as.

### rF@irtid by Sectban lla ofArticle VII 

### of the Constitution ofTexas and **are** not eligible as an investment of the Permanent University Fund ofthe University 

### ofTexas. 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