                               E             0             Y       GENERAL
                                           OF           EXAS
                                          AUSFN        II. TExas
  WVILL  WILSON
AlTORNEYGENERAL                               August     5, 1958


Hon. Leroy Jeffers, Chairman                               Opinion     No. WW-484
The Board of Regents
The University   of Texas                                  Re:     The authority of the Board of
Esperson  Building                                                 Regents of The University     of
Houston 2, Texas                                                   Texas to invest the Permanent
                                                                   University  Fund in first lien
                                                                   real estate mortgage    securities,
                                                                   to contract with correspondent
                                                                   loan agents in various sections
                                                                   of Texas for the servicing    of such
                                                                   loans, and to pay such costs as are
                                                                   incidental to a program    of this na-
                                                                   ture.

Dear   Mr.   Jeffers:

                 Your request         for an opinion     states,    in part,   that

                 “The University   of Texas 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    of principal     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   of all payments
                        made by borrower     and of all disbursements   out of
                        reserve  accounts;

                 4.     Payment      of all 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     of FHA    insurance   premium     as it becomes
                   due;

             ‘f.   Makqa      report   on all delinquencies    which    may occur;

             8.    Secure and properly       check renewal     hazard     insurance
                   policies;

             9.    Make an annual inspection of peach mortgaged              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            of the Univer-
                   sity any ,forecloaed properties;
                                             I

         12.       Render full assistance    to the Untvarnity in the delivery
                   of the foreclosed  property to FHA in exchange for deben-
                   tures.

             The Unlvereity    will not pay tn excess of the standard current
             rate for these servicer, rendered by correspondents.      This
             rate is currently    l/2 of 1% annually on the declining princi-
             pal 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 ser-
             vicing of first lien mortgage loans and pay such costs as are
             incidental to a program    of thie nature in fulfilling the require-
             ments of Sectton lla of Article 7 of the Constitution?”

The items numbered 2, 6 and 12 in y,our question imply that the fir’st lten
mortgage  loans inquired about will be insured by mpayment of FHA insur-
ance premium as it becomes 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 of the National
Housing Act. as amended, and this opinion is li’mited                           to such mortgages.

          The basic question presented   is whether or not such an invest-
ment of the Permanent   University  Fund is one permitted by the following
language of Section lla of Article VII of the Constitution of Texas:

           ”
             . .  ., the Permanent  University Fund may be invested
           in first lien real estate mortgage  securities guaranteed
           in any manner in whole by the United States Government
           or any agency thereof.    . .:-

 :*Are such mprtgages                     ‘guaranteed   . . . in whole”   as so required?
.’
          The National Housing Act, codified as 12 U.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 of rules, regulations      and procedures   prescribed  by the Federal
Housing Commissioner,       who is empowered     to administer  the Act.

           To quote verbatim Section 203 and all of the many lengthy subse-
quent sections of the Act pertaining      to these mortgages,  would unduly pro-
long this opinion.    It will suffice here to quote briefly from the Act and ,from
an official publication    of rules. and regulations of the Federal  Housing Com-
missioner   entitled ‘FHA Mortgagee’s Handbook,” consisting         of 1,510 num-
bered paragraphs,      to which we will refer as the “Handbook.”

            In determining   whether the “insurance”     of such mortgages    by FHA
is sufficient to render them “guaranteed       . . . in whole” for the benefit of the
Permanent      University  Fund, it should first be noted~ that the following appears
in the Act in Section 203:

           4s
                .   .    .




           “(b)              To be eligible        for insurance   under this section   a mort-
                             gage shall -

                              (1)   have been made:to, and be held by, a mortgagee   ap-
                                    proved 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 a mortgage,     what ia the protection afforded to
the Permanant   University   Fund by FHA in event of default and when it be-
comes necessary    to foreclose?

                  Section 1102 of Chapter XI of the Handbook,        entitled       “Pro-
cedures   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 in the
       event of default the mortgagee       will be able to communicate
       readily with the mortgagor       and will exercise    diligence   in at-
       tempting to obtain payment in accordance          with the terms of
       the mortgage.    Proper     servicing of the mortgage is, of
       course,  the responsibility     of the mortgagee    and is not a
       function to be assumed by FHA inauring offices . . **

                 Thus, it is apparent that it would be the duty of the mortgagee
(the University)   to ‘service”   the mortgage  and to bear the expensea of at-
tempting to collect delinquent monthly installment      payments owed ~:by the
mortgagor,    and to defray the coats and expenses    incident to foreclosure  pro-
ceadings,  among other things.

                How much of the,se coats and expenses  are to be borne by the
‘correspondent’    mortgage    banker who ‘currently” would receive  l/2 of 1%
annually on the declining principal balance for the lervicea 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   pay-
manta (Itim 1 covers only the collection     of principal  and intareat *aa it
maturer*).     Itama 10, 11, and 12 clearly ahow that the University     would coa-
duct and pay the coata and expenses incident to foreclosure       and conveyance
of the foreclosed   property to FHA (the correspondent      mortgage   banker Oauper-
vlalng and aaaisting”)r    and whennecessary    the Unlveralty  would pay the cor-
reapondent mortgage      banker an unatated amount to manage any foreclosed
properties   (*for the account of the University’   we take to mean *at the ex-
pexae of the University*).
Hon. Leroy   Jeffers,    page   5, WW-484




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

                This    procedure   is outlined   in Section   204 of the Act,   as f.ol-
lows:

                *Sec. 204. (a) In any case in which the ,mortgagee
               under a mortgage     ins,ured under section..203 shall
               have foreclosed    and taken possession       of the mort-
               gaged property    in accordance     with regulations    of,
               and within a period to be determined         by, the Com-
               missioner,   or shall, with the consent of the Commis-
               sioner, have otherwi8.e acquired such property from
               the mortgagor    after default, the mortgagee       shall be
               entitled to receive tha benefit of the insurance as
               hereinafter   provided,   upon (1) the prompt conveyance
               to the Commissioner      of title to the property which
               meets the requirements       of rules 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    to him of all claims of the mortgagee
               against the mortgagor      or others, arising out of the
               mortgage transaction      or foreclosure     proceedings,
               except such claims as may have been released            with
               the consent of the Commissioner.         Upon such convay-
               ante and assignment      0.e&e    Commissioner       shall,..r-
                issue to the mortgagee     debentures   having a total face
               value equal to the value of the mortgage         and a certifi-
               cate of claim, as hereinafter      provided.     For the
.,.




      Hon. Laroy   Jeffers,   page 6, WW-484




                      purposes    of this subsection,    the value of the
                      mortgage shall be determined,         in accordance
                      with rules ,and regulations      prescribed    by the
                      Commissioner,       by adding to the amount of the
                      original principal     obligation of the mortgage
                      which was unpaid on the date of the institution
                      of foreclosure    proceedings,     or on the date of
                      the acquisition    of the 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 assess-
                      ments which are noted on the application           for insur-
                      ance 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 .by deducting from such total amount any amount
                      received   on account of the 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#h dates . . .”

                     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     on account of the cost of foreclosure
                     (or of acquiring   the property by other means) actually
                     paid by the mortgagee     and approved by the Commissioner
                     an amount, not in excess of two-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 of the 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 of the mortgage,”
      plus an allowance     (which never exceeds     $75.00) on mortgagee’s    foreclosure
      expenses,   or other expenses     of acquiring  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 on the present market but may be sold at this time
     only at a heavy discount from such face value.       Further,  Section 204 (d)
     of the Act provides   that the debentures   shall bear interest *at a rate de-
     termined by the Commissioner”       but-never to exceed ‘3 per centum per
     annum, ” whereas    the original mortgage bore interest at the rate of five
     (5) per cent. Also, such debentures      “shall mature twenty years after the
     date thereof.”

                   That the total face value of the debentures, plus the “cash sd-
     justment’, may not be sufficient to make the mortgagee whole is very evi-
     dent from ~the following quotation from Section 204(e) of the act:
..
                     “The certificate   of claim issued by the Commissioner
                     to any mortgagee shall be for an amount which the Com-
                     missioner   determines    to be sufficient, when added to
                     the face value of the debentures      issued and the cash ad-
                     justment 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.        of the property covered
                     by the mortgage, the mortgagor had redeemed              the property
                     and paid in full all obligations  under the mortgage         and a
                     reasonable   amount for necessary       expenses     incurred by
                     the mortgagee    in connection with the foreclosure         proceed-
                     ings, or the acquisition   of the mortgaged       property   other-
                     wise, and the conveyance thereof to the Commissioner.               . .”

                    It is obvious that issuance and payment of the *Certificate        of
     Claim” may be necessary,      in addition to the debentures      and the “cash adjust-
     ment. ” in order to place the mortgagee      University   in the position it would
     have been had the mortgagor      fully discharged   its obligations   under the mort-
     mre-

                     But neither the FHA nor. anyone else is bound to pay this ‘Cer-
     tificate of Claim.”   It may be paid in full, it may be partially      paid, or it may
     never be paid at all.’ Collection   of this Certificate   by the University     mortgagee
     depends entirely upon the results of the sale of the mortgaged          property by the
     Commissioner,     when and if it is sold. If the 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    of Claim.   In
     any event, the Certificate   is eventually subject to “voidance and termination”
     Hon. Leroy     Jeffers,    page   8, WW-484




     by   the Commlarionrr,          (goctlon    204(f) of the Act. and portlonr     of tho Hand-
     book quotod bolow)

                      Scetton      1125 of tko       Handbook   makes   this ststkiwat:

                      “The mrtiflaato           of
                                              claim ia irauod aa af the date of
                      convoyanas     of title to tbhc FHA in an ameunt auffi-
                      cient to ctqusl roll amounts due under tko mavtg&++
                      ivat fkh4l        hy the remount 130the dihkntuiee,         , . ‘7

      And Section   1154 dsscriba$        the fate of the “Gertiflstrte      ef Clatm”     in thle
    ‘I h8Ull80 :

                      "Tha aarttficatr    of claim rhrrll becume void and of
                      no’ offect (a) qpon the payment of euch eaaaa~ aa
                      prsvldad abavy: (whothrr it liquldrtap the certlfteak,
                      in part or La full), or (b) upon tha friluro of thr Com-
                      mi&sLonrr to rralho      any rxaraa   upon tho full ltquida-
                      tion of the proprrty,     Upon the llquldotion   of the prop-
                      rrty the CommLarLonrr shall notlfy thr rrglatorad
                      holder of tho cartlflcrta    by mail at tho port office
                      nddrona an shown by tho rocordr of tho CommLorionor,
                     ~of tho dlrporitlon   of the procoodr and pf the SoLdnnco
                      and tormlnation of tho cortlflcato     of claim,” v

                     Although the Toxar courtr have not construed the phraao
      “guaranteed   . , . Ln whole” , we view its meaning as too plain to require.
     construction.    The ordinary meaning of the word “guarantee”         is that
     some ono else la primarily       liable for a debt and that the guarantor will
.
     pay it lf the primary debtor doer not. Charleston         Five Cents Savlnga v.
     Wolf,   36 N.E. 2d 390, 392; 309 Mesa. 547. And the word “whole”, as de-
     tined in Websbx’s      New International    Dictionary,  Unabridged.  1957, at
     page 2,921, means “contahing        all lta conatttutent or lntogral parts or ale-
     mente; having nothing lacktng or taken away; full; entire.”

                     We conclude that tho mortgages inquired about are not “guaran-
     teed . . . ln whole” for the reason that the~mortgagao     Unlver,alty may never
     co,llect Ln monoy all that it 1s entitled to collect under the mortgage    ltaelf.
    ,While the FHA insurance      arrangement   may pay a major portlon of the Univer-
     sity’s loss, and in times of economic prosperity      may pay It all, there Is no
    ~‘guarantee”    of this and such mortgages do not satisfy this constitutional re-
     quirement.
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
of Regents may not exceed certain         limitations   in authorizing expenditures
for administering     the Permanent     University    Fund.   The acquisition,   servic-
ing and liquidation of such mortgages        would be included in such administra-
tive expenses.      These limitations   are contractually     imposed in certain bond
resolutions    authorizing   the issuance of outstanding bonds of the Permanent.
University    Fund. For example,       on page 13 of the bond resolution      authoris-
ing the Board of Regents of the University          of Texas Permanent     University
Fund Refunding Bonds, Series         1958, in the amount of $5,076,000.00,       there
appears    the following:

                “16. That the Board of Regents of the University
                of Texas covenants and agrees as follows:

                . . .


                *(b)  That it will restrict expenditures  for adminls-
                tering the Fund to a minimum consistent with pru-
                dent 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% of the book value of the Permanent     University
                Fund.”

                                     SUMMARY

                ,The first lien real estate mortgage      securities   inquired
                about are not guaranteed. fu whole as. rF@irtid        by Sectban
                 lla of Article   VII of the Constitution   of Texas   and are
                not eligible   as an investment of the Permanent        Univer-
                sity Fund of the University     of Texas.

                                                      Very   truly yours
HWM-s
                                                      WILL    WILSON
APPROVED:

OPINION   COMMITTEE
Geo. P. Blackburn,   Chairman
Grundy Williams                                                   Assistant-        /
J. Milton Richardson
Morgan Nesbitt
Henry G. Braswell                    :

REVIEWED   FOR THE ATTORNEY                 GENERAL
By: W. V. Geppert
