## THE ATI-ORNEY,~ENERAL OF -XAS

February25,1972

Honorable Jesse James State Treasurer Opinion No. M-1077 State CapitolBuilding Re: Austin, Texas 78711 Authority of the State Deposltory Board to acceptMortgageBacked Serial Notes guaranteed by the GovernmentNational 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 certainMortgage-Backed Serial Notes issued pursuant to regulationsof the Department of Housing and Urban Development are acceptable as collateral for State depositsunder Article 2529,V.C.S. These notes are part of a securities programauthorizedby Section 

## 306(g)

of the National Housing Act, 12 U.S. C. 1723a. The securities are issued by private Issuers and are securedby pools of mortgages Insuredby the Federal Housing Administration, Farmers' Home Administration or the Veterans' Administration. The payment of principaland Interest are guaranteed, in various degrees, by the GovernmentNationalMortgage Association (GNMA).
At the ties: present time, there are three basic types of securi-

(1) The "straightpass 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 principaland interest of the mortga'ge pool, as and If collected.

" (2) The eartiallymodified pass through" type; the terms of wh ch orovlde for the oavment to the security holders of a proportionate share of-the proceedsof the principal as collected, togetherwith a fixed rate of Interest on the unpaid principalbalance, whether or not collected. (3) The "fullymodified pass through" type; which provides for paymentby the issuer of both specified
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. -1.

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

principal installmentsand a fixed rate of interest on the unpaid principalbalance regardless of its collectionsunder the pooledmortgages. Under Subpart B of Part

## 1665 of Title 24, Code of Federal Regulations (CFR), certain "bond type" securitiesare 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 

## 1665Title 24, CFR, GNMA Is authorized to guaranteeunder type 11)above, that the issuer will make timely payment to the holder of his proportionalpart of the collectionsby the Issuer. Under type (2)above, the GNMA guarantees a timely payment of the principal payments,as collected,and a fixed Interest pament whether collectedby the issuer or not. 

## (39 Under type the GNMA guaranteesboth principaland interest payment to the holder whether collectedby the issuer or not. Article 2529, Vernon's Civil Statutes, is the authority for the State Treasurer to accept securitiesas collateral for State deposits. The pertinent portion of Article 2529 providesas follows:

'l...(b)

by pledgingwith the Treasurer any securities of the following kinds: bonds and certificatesand other evidence of indebtedness of the United States, and all other bonds which are guaranteed as to both principaland interest by the United States;../ (Emphasisadded). The securities in question heremust 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 interpretationand it Is believed that our Opinion NumberM-197 

## (1968) would govern this matter. As pointedout there, each note must be examined individually to determine if there is an unconditional guarantee of principal and interest by the governmentalagency.

-5275-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 "partiallymodified pass through" types)would not qualify as being "bondsguaranteed as to both principaland Interestby the United States." It is our further opinion that the "fullymodified 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 guaranteeby GNMA of the principal and interest payments called for in the note. Your questionsnumbers 2, 3, 

## 4,5, 

## 6and 

## 8,are fact questions thatmust be determinedby examination of the individual notes and, therefore,we can give no opinion at this time.
Your question number 

## 7asks 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 precedingArticle, 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 retainedby 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 realizeupon such bonds or other securities depositedby 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 securitieswere secured..." It is our opinion that under this Article any pledged securitiesheld by the Treasurermust 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.

-5276-Honorable Jesse James, page 4, (M-1077)

SUMMARY The State Treasurermay accept MortgageBacked Serial Notes as collateral for State deoosits if. upon examination, the payment of

and Interest are unconditionally the GovernmentNationalMortgage the prlncipil guaranteedby Association. form. The notes must be in negotiable

Preparedby 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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