        THE       ATI-ORNEY,~ENERAL
                     OF    -XAS




                         February 25, 1972

Honorable Jesse James       Opinion No. M-1077
State Treasurer
State Capitol Building      Re:   Authority of the State Deposl-
Austin, Texas 78711               tory Board to accept Mortgage-
                                  Backed Serial Notes guaranteed
                                  by the Government National
                                  Mortgage Association as collat-
                                  eral for State deposits under
                                  Article 2.529Vernon's Civil
Dear Mr. James:                   Statutes.
     You have requested our opinion on whether certain Mort-
gage-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 present time, there are three basic types of securi-
ties:
         (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,heproceeds
    of the principal and interest of the mortga'gepool, 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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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 1665of 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. Under type
(39 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 pro-
visions of the underlined portion of Article 2529 to be eli-
gible 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.



                           -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 "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 con-
tain 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 men-
     tioned, 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 dls-
     burse 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 Mortgage-
     Backed Serial Notes as collateral for State
     deoosits if. upon examination, the payment of
     the prlncipil and Interest are unconditionally
     guaranteed by the Government National Mortgage
     Association. The notes must be in negotiable
     form.




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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