[Federal Register Volume 61, Number 82 (Friday, April 26, 1996)]
[Notices]
[Pages 18652-18655]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10444]




[[Page 18651]]


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Part II





Department of Housing and Urban Development





_______________________________________________________________________



Sale of HUD-Held Multifamily Mortgage Loans; Notice

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

[[Page 18652]]



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 HUD-Held Multifamily Mortgage Loans

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner, HUD.

ACTION: Notice of sale of mortgage loans.

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SUMMARY: This notice announces the Department's intention to sell 
approximately 157 unsubsidized multifamily mortgage loans <SUP>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.

    \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).
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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 speech-impaired 
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 
low-income 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

[[Page 18653]]

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 
multiple-class 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 
<SUP>2). That final rule includes mortgage sale-related 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.
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    \2\  The March 21, 1996 final rule revised 24 CFR part 290 in 
its entirety, and it amended and renumbered the mortgage sale 
regulations.
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    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 tenant-based 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 Sec. 290.114(c) of the interim rule (renumbered as 
Sec. 290.39(c) in the March 21, 1996 final rule), the

[[Page 18654]]

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, 
Sec. 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 Sec. 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 Sec. 290.110 (see 24 C.F.R. part 290, revised April 1, 
1995; renumbered as Sec. 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 Sec. 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 low-income 
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 Sec. 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 project-based 
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-in-lieu 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

[[Page 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 
portfolio-based 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