18652 Federal Register / Vol. 61, No. 82 / Friday, April 26, 1996 / Notices

1 None of the mortgage loans in this sale are

subject to the settlement agreements in Walker v.

Kemp, No. C–87–2628 (N.D. Cal.). See generally,

Walker v. Pierce, 665 F. Supp. 831 (N.D. Cal. 1987)

(granting preliminary injunction).

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

[Docket No. FR–4071–N–01]

Office of the Assistant Secretary for

Housing-Federal Housing

Commissioner; Notice of Sale of HUDHeld Multifamily Mortgage Loans

AGENCY: Office of the Assistant

Secretary for Housing-Federal Housing

Commissioner, HUD.

ACTION: Notice of sale of mortgage loans.

SUMMARY: This notice announces the

Department’s intention to sell

approximately 157 unsubsidized

multifamily mortgage loans 1 without

Federal Housing Administration (FHA)

insurance. Almost all of the mortgages

are secured by partially assisted

projects, defined as projects that receive

Section 8 project-based rental subsidies

for up to 50% of the units. The

mortgages will be offered through a trust

to eligible institutional investors on a

private placement basis. The form of the

disposition will be a structured

financing.

DATES: Bidding Materials are available

to eligible bidders. Closing is expected

in the middle of June, 1996.

ADDRESSES: Bidding Materials are

available from FHA’s Financial Advisor,

Hamilton Securities Advisory Services,

Inc. (‘‘Hamilton’’) 7 Dupont Circle,

N.W., 2nd Floor, Washington, DC

20036. Bidding Materials will be made

available only to parties who complete

a Confidentiality Agreement and a

Bidder Qualification Statement and are

deemed eligible bidders by Hamilton,

pursuant to criteria established by FHA.

To obtain a Confidentiality Agreement

and a Bidder Qualification form, contact

Hamilton at (202) 496–6700. Hamilton

will forward Bidding Materials to

eligible bidders via overnight delivery

service. Asset Review Files (ARFs) for

the mortgage loans included in the

Partially Assisted Sale are available for

review by eligible bidders who visit the

due diligence facility located at 1140

Connecticut Avenue, N.W., Suite 302,

Washington, DC 20036. Alternatively,

ARFs can be ordered from Williams,

Adley & Company, LLP at the above

address. To schedule a visit to the due

diligence facility or to order ARFs,

eligible bidders should contact Mr. Ray

Curtis (or Mr. Henry Kiema) at (202)

496–0965. The due diligence facility

will be open between the hours of 9:00

a.m. and 6:00 p.m., Monday though

Friday. The facility will close on May

14, 1996. (The above telephone numbers

are not toll-free numbers.)

FOR FURTHER INFORMATION CONTACT:

Audrey Hinton, Associate Director for

Program Operations, Office of

Multifamily Asset Management and

Disposition, Office of Housing, Room

6160, Department of Housing and Urban

Development, 451 Seventh Street, S.W.,

Washington, DC 20410; telephone (202)

708–3730, Ext. 2691. Hearing or speechimpaired individuals may call (202)

708–4594 (TTY). These are not toll-free

numbers.

SUPPLEMENTARY INFORMATION: The

Department announces its intention to

dispose of approximately 157 mortgage

loans (‘‘Mortgage Loans’’), almost all of

which are secured by multifamily

projects that are subject to project-based

Section 8 Housing Assistance Payments

(‘‘HAP’’) contracts, providing rental

assistance, on behalf of eligible lowincome households, for up to 50% of

the units in each project (‘‘Partially

Assisted Projects’’). Almost all of the

Mortgage Loans have experienced

varying levels of delinquency; some are

subject to provisional workout

agreements. The Mortgage Loans will be sold to a

special purpose Delaware business trust

(‘‘Trust’’) without FHA insurance. The

Trust will be formed by the successful

Trust Certificate/Servicer bidder and an

Owner Trustee. The Trust will issue

debt in the form of floating rate bonds

(‘‘Bonds’’) and equity interests in the

form of a Class A Trust Certificate and

Class B Trust Certificates. Eligible

bidders will be afforded an opportunity

to bid competitively on the Bonds and

the Class A Trust Certificate, each of

which will be sold separately to a single

bidder. The successful Class A Trust

Certificate Bidder, an affiliate thereof, or

a non-affiliated entity having a

contractual relationship with the Class

A Trust Certificate Bidder will act as

Servicer for the Trust. The Servicer

must be approved by the participating

rating agencies, Standard & Poor’s

Ratings Group and Fitch Investors

Services.

The Department will transfer all right,

title and interest to the Mortgage Loans

to the Trust and will have no control

over the servicing or disposition of the

Mortgage Loans by the Trust. In

consideration for the sale of the

Mortgage Loans to the Trust, the

Department will receive the proceeds

from the issuance of the Bonds and

Class A Trust Certificate, net of certain

amounts, and the Class B Trust

Certificates, representing beneficial

interests in the Trust. The Department

may transfer all or part of the Class B

Trust Certificates to one or more

investors in the future, and without

further notice. Holders of Class B Trust

Certificates will have a passive role with

respect to the Trust.

The Bidding Process

The Bidding Materials describe in

detail the procedure for participating in

the Partially Assisted Sale and include

summary information, bid forms, drafts

of proposed transaction documents,

information on each of the Mortgage

Loans, such as the unpaid principal

balance and interest rate, and a

Preliminary Private Placement

Memorandum for the Bonds. Also, the

Bidding Materials include a computer

diskette with general portfolio

information and selected data fields on

each Mortgage Loan.

Hamilton will distribute the Bidding

Materials over a period of

approximately 8 weeks prior to the sale.

The Bidding Materials will be

supplemented periodically, up to the

sale. Bidding Materials are available to

eligible bidders from Hamilton, as

described above.

Bidders must be eligible institutional

investors in order to have their bids

considered. FHA’s Financial Advisor

will determine whether a bidder is

qualified on the basis of the information

provided by each bidder in its

Qualification Statement. Bidders

interested in purchasing the Bonds will

be required to submit two bids: an

Indicative Bond Bid and a Final Bond

Bid, in accordance with the Bid

Instructions contained in the Bidding

Materials. Bidders on the Class A Trust

Certificate will be provided with

information regarding the Indicative

Bond Bids, prior to submitting their

bids. Eligible Final Bond Bidders will be

informed of the identity of the

successful Class A Trust Certificate

Bidder (and thus the Servicer) and its

winning bid prior to the date that the

Final Bond Bids are due.

The Bidding Materials require Bond

and Certificate bidders to make certain

deposits, and provide for the retention

of deposits, in whole or in part, by FHA

under various circumstances described

in the Bidding Materials. Further, the

Bidding Materials require the winning

Bond bidder and Class A Certificate

bidder to pay various settlement

expenses and other transaction costs.

FHA Reservation of Rights

The Department reserves the right to

delete any Mortgage Loan from the

Partially Assisted Sale, as provided for

in the Bidding Materials, for any reason

and without prejudice to its right to
Federal Register / Vol. 61, No. 82 / Friday, April 26, 1996 / Notices 18653

2 The March 21, 1996 final rule revised 24 CFR

part 290 in its entirety, and it amended and

renumbered the mortgage sale regulations.

include any deleted Mortgage Loan in a

future sale.

The Department reserves the right, at

its sole discretion and for any reason

whatsoever, to reject any and all bids.

The Department reserves the right to

terminate the Partially Assisted Sale at

any time prior to the Class A Trust

Certificate bid date.

Timely Bids and Deposits

Each bidder assumes all risk of loss

relating to its failure to deliver, or cause

to be delivered, on a timely basis and in

the manner specified in the Bidding

Materials, each bid form and deposit

required.

Winning Bids

The winning Class A Trust Certificate

bid will be based upon the highest

dollar price per percentage interest in

the Trust. The winning Bond bid will be

based on the lowest ‘‘weighted-average

spread.’’ If there are two bids with the

same dollar price percentage, the

successful bid will be the bid that

provides the greater amount of proceeds

to FHA. In the event of a tie, i.e., there

is more than one winning bidder on the

Bonds or the Class A Trust Certificate,

a ‘‘best and final’’ round will be held.

If all of the bidders involved in the tie

situation are unwilling to change their

bids or they remain tied after the ‘‘best

and final’’ round, FHA will determine

the winning bidder by lottery, provided,

however, that with respect to tie Bond

bids, FHA reserves the right to choose

a single-class bid over any multipleclass bid if such circumstances exist.

Due Diligence Facility

During the distribution period for

Bidding Materials, the due diligence

facility will be open to eligible bidders.

The address of the facility is specified

above. A non-refundable $720 fee is

required, which entitles an eligible

bidder to access to the facility, and can

be applied toward the cost of an

individual ARF. The files contain title

information, mortgage and financial

documents, Section 8 Housing

Assistance Payments (HAP) contracts,

site inspection reports and

environmental reports, among other

pertinent information. The cost of each

ARF is $180, plus shipping costs ($20

for the first ARF and $7 for each

additional ARF ordered). The

Department reserves the right to revise

this fee schedule, without prior notice,

to recover its copying, shipping and

handling costs.

Ineligible Bidders

Notwithstanding a bidder’s

qualification as an eligible institutional

investor and approved servicer, the

following individuals and entities

(either alone or in combination with

others) are ineligible to bid on the Class

A Trust Certificate and Bonds:

(1) An entity debarred from doing

business with the Department pursuant

to 24 CFR part 24;

(2) An entity controlled by an FHA

employee or by a member of such

employee’s household;

(3) An entity which employs or uses

the services of an FHA employee

involved in the Partially Assisted Sale

other than in such employee’s official

capacity;

(4) An entity employing the services

of an FHA employee to assist in the

preparation of a bid for the Class A

Trust Certificate or Bond;

(5) Any contractor, subcontractor and/

or consultant (including any agent of the

foregoing) who performed or is

performing services for, or on behalf of,

FHA in connection with the Partially

Assisted Sale or any affiliate of such

contractor, subcontractor, consultant or

agent;

(6) An entity using the services for its

Class A Trust Certificate bid or Bond

Bid, of an employee or former employee

of an entity listed in (5) above; and

(7) In addition to the entities

described in (1) through (6) above, the

following entities are ineligible to bid

on the Class A Trust Certificate:

(a) An entity that served as a loan

servicer or performed other services for,

or on behalf of, FHA, with respect to

any of the Mortgage Loans at any time

during the two-year period prior to May

13, 1996, or any affiliate thereof;

(b) Any Mortgagor of any of the

Mortgage Loans or an entity affiliated

with any such Mortgagor.

Mortgage Sale Policy

General

Pursuant to Section 203(k)(4) of the

1978 Housing and Community

Development Amendments of 1978, as

amended, 12 U.S.C. 1701z–11(k)(4), the

Secretary is expressly authorized to sell

mortgages on unsubsidized projects

(which include partially assisted

projects) on any terms and conditions

the Secretary prescribes. The mortgage

sale rules are codified at 24 CFR part

290, subpart B (see final rule published

March 21, 1996 at 61 FR 11684, 11690–

11691 for effect on April 22, 1996 2).

That final rule includes mortgage salerelated amendments to part 290 made

by an interim rule published February 6,

1996 at 61 FR 4580 for effect on March

7, 1996. These amendments apply to the

Partially Assisted Sale, among other

mortgage sales. Interested parties are

advised to review these rules.

This notice describes the

implementation of the Department’s

statutory authority and its regulations in

the context of the Partially Assisted

Sale. For the reader’s convenience,

parallel citations are provided to

subpart I (including the interim rule

published on February 6, 1996 and

made effective March 7, 1996) and

subpart B (the mortgage sale rules as

republished and renumbered on March

21, 1996).

Tenant Protections in Partially Assisted

Sale

The interim rule, published on

February 6, 1996, prescribes certain loan

sale terms which are designed to

safeguard tenant interests, and assure

the continuation of project-based and

tenant-based Section 8 rental subsidy

contracts.

With respect to Mortgage Loans that

are delinquent at the time the

Department offers them for sale to the

Trust, the transaction documents will

impose certain affirmative obligations

on the Trustee and Servicer. 24 CFR

290.112 and 290.114(d) (renumbered as

24 CFR 290.37 and 290.39(d) in the

March 21, 1996 final rule). The

transaction documents will provide that

certain covenants, running with the

land, will be executed and recorded as

a condition of a loan restructuring or a

discounted pay-off of the mortgage

indebtedness, or will be incorporated in

a foreclosure deed as well as in any

deed-in-lieu of foreclosure that may be

accepted. The first covenant will

obligate a future project owner

(including the Trust) to assume any

outstanding project-based Section 8

HAP contract. (However, the assignment

of a Section 8 contract will continue to

be subject to HUD or the Section 8 HAP

contract administrator’s prior approval,

as applicable.) A related covenant will

obligate a future project owner

(including the Trust) to assume tenantbased federal rental subsidies (vouchers

or certificates) in use at the property at

the time of sale or other transfer of

ownership of a property. Both covenants

will expire on the date the last executed

Section 8 HAP contract for the project

expires. A third covenant will prohibit

current and future owners from

discriminating against certificate and

voucher holders. The nondiscrimination

covenant will expire on the original

maturity date of the Mortgage Loan.

To implement § 290.114(c) of the

interim rule (renumbered as § 290.39(c)

in the March 21, 1996 final rule), the
18654 Federal Register / Vol. 61, No. 82 / Friday, April 26, 1996 / Notices

Department is conditioning its

assignment of Mortgage Loans on

Partially Assisted Projects that are

current when the Department offers

them for sale to the Trust. Owners of

such projects will be prohibited from

discriminating against certificate and

voucher holders. This condition will

expire on the date the Mortgage Loan is

satisfied. With respect to current

Mortgage Loans on Partially Assisted

Projects, § 290.114(c) does not compel

or necessitate covenants that are

recorded and run with the land.

The nondiscrimination obligation

with respect to delinquent Mortgage

Loans on all projects and current

Mortgage Loans on Partially Assisted

Projects will be enforceable by

certificate and voucher holders, as well

as by public housing authorities that are

Section 8 HAP contract administrators

for relevant projects. The covenant

regarding assumption of project-based

and tenant-based Section 8 HAP

contracts will be enforceable by the

Section 8 HAP contract administrator

for the project.

Further, with respect to Mortgage

Loans on Partially Assisted Projects that

are delinquent at the time they are

offered for sale to the Trust, the

transaction documents will prohibit the

Trust and the Servicer, and their

successors and assigns, from foreclosing

in a manner that interferes with existing

residential leases. This condition will

also be incorporated into the assignment

of individual Mortgage Loans with

respect to these projects. Section

290.112(b) of the interim rule

(renumbered as § 290.37(b) in the March

21, 1996 final rule) limits this lease

protection to Section 8 assisted tenants.

The Department invited comment on a

proposal to add protections for

unassisted tenants. (See preamble

discussion at 61 FR 4582, February 6,

1996.) For the Partially Assisted Sale,

the transaction documents will include

a non-interference obligation with

respect to both assisted and unassisted

tenants. For unassisted tenants,

however, this protection will continue

for the lesser of the remaining term of

the tenant’s lease or one year.

Other Mortgage Sale Rule Provisions

Pursuant to § 290.110 (see 24 C.F.R.

part 290, revised April 1, 1995;

renumbered as § 290.35 in the March 21,

1996 final rule) loans on unsubsidized

projects (which include the partially

assisted portfolio) may be sold without

FHA insurance. The Department has

decided to sell the Mortgage Loans in

the Partially Assisted Sale to the Trust

without FHA insurance.

Section 290.110 (renumbered as

§ 290.35 in the March 21, 1996 final

rule) also provides for the exclusion of

certain delinquent unsubsidized

mortgages from sale where it appears

that: (1) foreclosure is unavoidable, and

(2) the project is occupied by very lowincome tenants who are not receiving

housing assistance and would be likely

to pay rent in excess of 30 percent of

their adjusted monthly income if the

mortgage were to be sold and foreclosed.

The Department’s interpretation of this

provision is set forth in the preamble to

the February 6, 1996 interim rule (see 61

FR 4580–4581). The Department has

made an administrative determination

that the Mortgage Loans to be offered in

the Partially Assisted Sale do not meet

the criteria for exclusion.

Other Federal Requirements

As part of the reinvention process, the

Department is streamlining its

regulations by removing redundant and,

therefore, unnecessary regulations. For

this reason, the Department removed a

mortgage sale rule provision, 24 C.F.R.

290.102 (published on March 2, 1995),

in the final part 290 regulations

published on March 21, 1996.

Any recipient of federal financial

assistance, such as Section 8 rental

assistance, is subject to Title VI of the

Civil Rights Act of 1964, 42 U.S.C.

2000d–1, see also 24 CFR part 1; Section

504 of the Rehabilitation Act of 1973, 29

U.S.C. 794, see also 24 CFR part 8; and

executive orders pertaining to civil

rights. All multifamily rental housing

owners and lenders, among others, must

comply with Title VIII of the Civil Right

Act of 1968, as amended by the Fair

Housing Amendments Act of 1988, 42

U.S.C. 3600–3620, see also 24 CFR part

100.

Competitive Sale Method; Structured

Finance Disposition

The Department will use competitive

methods for recovering the value of the

Mortgage Loans to be transferred to the

Trust, through an auction of debt

securities secured by the cash flow of

the Mortgage Loans and beneficial

equity interests in the Trust. This is

consistent with § 290.100 (renumbered

as 290.30 in the March 21, 1996 final

rule) which provides that mortgages on

unsubsidized projects (which include

the partially assisted portfolio) shall be

sold on a competitive basis.

In light of the experience of other

agencies, including the Resolution Trust

Corporation, and its own analysis, the

Department believes that a structured

finance disposition will maximize

recovery on the Mortgage Loans in the

Partially Assisted Sale to the benefit of

the American taxpayer. A structured

finance is expected to yield a higher

return than a whole loan sale for a

variety of reasons. Capital markets

provide greater liquidity, and should

enhance the Department’s proceeds

from the Bonds and Class A Certificate.

Also, HUD’s capture of a percentage of

the residual value of these assets

through the Class B Certificates

mitigates any losses in the portfolio’s

value arising from market discounting

due to the future expiration of projectbased Section 8 HAP contracts or

because of the market’s unfamiliarity

with the Section 8 program generally, or

partially assisted projects in particular.

Moreover, HUD’s retention of this

passive interest will enable it to share

any increase in the loan portfolio’s

value after the sale due to favorable

market conditions.

In addition, a structured finance

disposition advances the Department’s

public policy goals without adding

administrative burdens. The Department

has an opportunity to develop a set of

transactional documents that create

accountability by the mortgage

purchaser and its agents for compliance

with the mortgage sale rules. (See

Mortgage Sale Policy, Tenant

Protections in Partially Assisted Sale.)

In this transaction, the Servicer will be

responsible for the project owner’s

execution and recordation of the

covenants required in connection with a

loan restructuring or discounted pay-off

of a delinquent mortgage. The Servicer

also must use a deed that incorporates

the covenants required in the event of

foreclosure or acceptance of a deed-inlieu of foreclosure. The Trustee will

oversee the Servicer’s performance of

such duties. If the Servicer fails to carry

out these duties, the Trustee will have

a contractual remedy of reducing the

Servicer’s fees by fifty thousand dollars

($50,000) for each breach, which sum

will be paid to HUD. This remedy,

which creates financial disincentives for

non-compliance with the rules, would

not be available in a whole loan sale

without allocation of the Department’s

limited resources. The foregoing is in

addition to any other remedies that may

be available to enforce the Servicer’s

duties.

A further advantage of a structured

finance is the unique opportunity it

presents for interaction between the

Section 8 HAP contract administrators

and the Servicer with respect to Section

8 matters. The transactional documents

will obligate the Servicer to report to the

Section 8 HAP contract administrator on

project sales, loan restructurings,

refinancings, and foreclosures, among

other events. The Servicer will receive
Federal Register / Vol. 61, No. 82 / Friday, April 26, 1996 / Notices 18655

from the HAP contract administrator

any standard notices of an owner’s

breaches of Section 8 HAP contracts,

and have an opportunity to cure.

Further, the Servicer will be required to

report periodically to the Trustee and

the holders of the Class A and Class B

Certificates on violations of Section 8

HAP contracts and on the recordation of

required covenants. A whole loan sale

would not lend itself to such a portfoliobased system of reporting and

interaction with respect to Section 8

HAP contracts.

In sum, a structured finance, through

the Servicer and the Trust, provides the

opportunity not available in a whole

loan sale to engineer accountability for

compliance with the mortgage sale rules

designed to protect tenants, and to

maximize the Department’s financial

return.

Disposition of Project Reserves and

Escrows

The mortgagor’s obligation to make

monthly payments to a replacement

reserve account is required by the FHA

Regulatory Agreement, which will be

terminated at the time the Mortgage

Loans are sold to the Trust (although the

Regulatory Agreement will be reinstated

in the event a Mortgage Loan is

repurchased by FHA from the Trust).

The Department will review the status

of reserve for replacement accounts and

other miscellaneous escrows and

accounts it controls for each Mortgage

Loan and related project, and make a

disposition decision prior to the

Partially Assisted Sale. Fund balances

will either be: (i) transferred to the

Trust; (ii) applied toward any

outstanding delinquency under the

Mortgage Loan; (iii) paid out to the

mortgagor, or (iv) in the case of certain

Section 8 replacement reserves,

maintained by the Section 8 HAP

contract administrator as described

below.

In general, real estate tax and hazard

insurance escrows, if any, will be

transferred to the Trust at closing and

administered by the Servicer. With

respect to delinquent Mortgage Loans,

fund balances in reserve for replacement

accounts generally will be applied to the

amounts owed to the Department under

the Mortgage Loans. Repair reserves

independently created by provisional

workout agreements will be transferred

to the Trust at closing.

Certain HAP Contracts for certain

Section 8 New Construction and

Substantial Rehabilitation projects

(‘‘New Regulation Projects’’)

independently require the funding and

maintenance of a replacement reserve

(‘‘Section 8 Reserve’’). With respect to

these projects, Section 8 reserves will

continue to be required after the sale in

accordance with the HAP contracts. The

Department does not plan to apply

available Section 8 Reserve funds held

for such projects, in the case of

delinquent Mortgage Loans, or release

these funds to the mortgagor, in the case

of current Mortgage Loans. The Section

8 HAP contract administrator (which

presently is HUD) will retain and

administer such accounts for after the

sale.

Scope of Notice

This notice applies to the FHA

Partially Assisted Sale, and does not

establish the Department’s policy for the

sale of any other mortgage loans.

Dated: April 23, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal

Housing Commissioner.

[FR Doc. 96–10444 Filed 4–25–96; 8:45 am]

BILLING CODE 4210–27–P