THE ATI-ORNEY,~ENERAL 

OF -XAS 

February 25, 1972 

Honorable Jesse James 

State Treasurer 

Opinion No. M-1077 

State Capitol Building Re: 

Austin, Texas 78711 

Authority of the State Deposltory Board to accept MortgageBacked Serial Notes guaranteed 

by the Government National 

Mortgage Association as collateral for State deposits under 

Article 2.529 Vernon's Civil 

Dear Mr. James: Statutes. 

You have requested our opinion on whether certain Mortgage-Backed Serial Notes issued pursuant to regulations of 

the Department of Housing and Urban Development are acceptable 

as collateral for State deposits under Article 2529, V.C.S. 

These notes are part of a securities program authorized by 

Section 306(g) of the National Housing Act, 12 U.S. C. 1723a. 

The securities are issued by private Issuers and are secured by 

pools of mortgages Insured by the Federal Housing Administration, 

Farmers' Home Administration or the Veterans' Administration. 

The payment of principal and Interest are guaranteed, in various 

degrees, by the Government National Mortgage Association (GNMA). 

At the 

ties: 

present time, there are three basic types of securi- 

(1) The "straight pass through" type; under which 

provision Is made for the payment to the holders of the 

serial notes of a proportionate share of t,he proceeds 

of the principal and interest of the mortga'ge pool, as 

and If collected. 

(2) The " e artially modified pass through" type; 

the terms of wh ch orovlde for the oavment to the security 

holders of a proportionate share of-the proceeds of the 

principal as collected, together with a fixed rate of 

Interest on the unpaid principal balance, whether or not 

collected. 

(3) The "fully modified pass through" type; which 

provides for payment by the issuer of both specified 

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f . 

-1. 

Honorable Jesse James, page 2, (M-1077) 

principal installments and a fixed rate of interest 

on the unpaid principal balance regardless of its 

collections under the pooled mortgages. 

Under Subpart B of Part 1665 of Title 24, Code of Federal 

Regulations (CFR), certain "bond type" securities are also 

authorized and these securities follow the same general form 

as the serial notes except they are bearer notes and are 

issued for much larger amounts. 

Under the applicable regulations, Part 1665 Title 24, 

CFR, GNMA Is authorized to guarantee under type 11) above, 

that the issuer will make timely payment to the holder of 

his proportional part of the collections by the Issuer. 

Under type (2) above, the GNMA guarantees a timely payment 

of the principal payments, as collected, and a fixed Interest 

pa ment whether collected by the issuer or not. 

(39 

Under type 

the GNMA guarantees both principal and interest payment 

to the holder whether collected by the issuer or not. 

Article 2529, Vernon's Civil Statutes, is the authority 

for the State Treasurer to accept securities as collateral 

for State deposits. The pertinent portion of Article 2529 

provides as follows: 

'l...(b) by pledging with the Treasurer any 

securities of the following kinds: bonds and 

certificates and other evidence of indebtedness 

of the United States, and all other bonds which 

are guaranteed as to both principal and interest 

by the United States;../ (Emphasis added). 

The securities in question here must come within the provisions of the underlined portion of Article 2529 to be eligible as collateral. A security of the type here involved 

is not normally considered to be a "bond" in the commercial 

sense. The issuer has, by the terms of the note, no liability 

in the event of default and Is simply a mortgage servicing' 

agent between the mortgagor and the holder of these notes. 

This office has, over the years, given the underlined language 

of Article 2529 a very broad interpretation and it Is believed 

that our Opinion Number M-197 (1968) would govern this matter. 

As pointed out there, each note must be examined individually 

to determine if there is an unconditional guarantee of principal 

and interest by the governmental agency. 

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Honorable Jess James, page 3, (M- 1077) 

It is our opinion that the Mortgage-Backed Serial Note 

contracts characterized in (1) and (2) above (the "straight 

pass through" and the "partially modified pass through" 

types) would not qualify as being "bonds guaranteed as to 

both principal and Interest by the United States." It is 

our further opinion that the "fully modified pass through" 

type of serial note set out in (3) above would qualify 

under Article 2529 If, upon examination, they in fact contain an unconditional guarantee by GNMA of the principal 

and interest payments called for in the note. 

Your questions numbers 2, 3, 4, 5, 6 and 8, are fact 

questions that must be determined by examination of the 

individual notes and, therefore, we can give no opinion 

at this time. 

Your question number 7 asks our opinion as to whether 

the State Treasurer should require an "assignment" of the 

notes before accepting the same as pledged collateral. 

Article 2530, Vernon's Civil Statutes, provides: 

"In the event the State Depository, as 

designated In the preceding Article, shall elect 

to deposit said pledged securities above mentioned, with the State Treasurer, the said 

securities shall be delivered to the Treasurer 

and receipted for by him, and retained by him 

in the vaults of the State Treasury..." 

This Artlcle~also provides in the third paragraph: 

t1 

. . . In the event that any State Depository 

shall fall to pay deposits or any part thereof 

on the check of the Treasurer, he shall have the 

power to forthwith realize upon such bonds or 

other securities deposited by said bank, and dlsburse the money arising therefrom according to 

law upon the warrants drawn by the Comptroller 

upo; the funds for which said bonds or other 

securities were secured..." 

It is our opinion that under this Article any pledged 

securities held by the Treasurer must be In negotiable 

form so that in event of default by the State Depository 

the Treasurer could comply with the last quoted portion of 

Article 2530. 

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Honorable Jesse James, page 4, (M-1077) 

SUMMARY 

The State Treasurer may accept MortgageBacked Serial Notes as collateral for State 

deoosits if. upon examination, the payment of 

and Interest are unconditionally 

the Government National Mortgage 

the prlncipil 

guaranteed by 

Association. 

form. 

The notes must be in negotiable 

Prepared by Marvin F. Sehtell u 

Assistant Attorney General 

APPROVED: 

OPINION COMMITTEE 

Kerns Taylor, Chairman 

W. E. Allen, Co-Chairman 

Bob Davis 

John Reeves 

James Quick 

Marietta Payne 

SAMUEL D. MCDANIEL 

Staff Legal Assistant 

ALFRED WALKER 

Executive Assistant 

NOLA WHITE 

First Assistant 

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