                           NEP     GENERAL

                            EXAS




Honorable Preston Smith              Opinion No. C-793
Lieutenant Governor
State of Texas
Austin, Texas                        Re:     Eligibility of FHA
                                             insured first lien
                                             mortgages as invest-
                                             ments ,forthe Per-
                                             manent University
                                             Fund of the University
                                             of Texas, and the author-
                                             ity of the Board of Re-
                                             gents of the University
                                             of Texas, the State
                                             Board of Education, the
                                             State Board of Trustees
                                             of the Employees Re-
                                             tirement System   and the
                                             State Board of Trustees
                                             of the Teacher Retire-
                                             ment System   to contract
                                             for the servlclng of
                                             FRA insured first lien
Dear Governor Smith:                         mortgage   Investments.
     You have requested reconsideration of Attorney General's
Q$-&o~8o     ww-484 (August 5, 1958), hereinafter referred to
     -   . In that opinion, the Attorney General said the
Permanent University Fund could not enter into contracts for
servicing mortgages  insured by the Federal Housing Administra-
tion (FHA) because:
          "The first lien real estate mortgage
     securities Inquired about are not guaranteed
     in whole as required by Section lla of Article
     VII of the Constitution of Texas and are not
     eligible as an investment of the Permanent
     University Fund of the University of Texas."




                          -3804-
                                                       .




                                                           2
Honorable Preston Smith, page 2 (C-793 )


     Your request points to changes in the statutes and
regulations pertaining to FHA Insured mortgages since WW-484
was rendered and closes with two questions that will be an-
swered in order.
         "(1) ARE FHA INSURED FIRST LIEN REAL
    ESTATE MORTGAGES NOW ELIGIBLE AS AN INVESTMENT
    FOR THE PERMANENT               D    THE UNI-
    VERsTTY
     Ww-484 was limited to those mortgages insured by the
FHA under Section 203 of the National Housing Act (12 U.S.C.
Sec. 1709), as amended, hereinafter referred to as the Act;
this opinion is also so limited. The basic question recited
in WW-484 was whether or not such mortgages were "guaran-
teed        In whole" as required by Section lla of Article
VII of'the'Constltution of Texas, the pertinent part of
which provides that:
          "/??
           -- The Permanent University Fund may
     be invested in first lien real estate mortgage
     securities guaranteed in any manner in whqle
     by:the United States Government or any agency
     thereof . . . . In making each and all of such
     investments said Board of Regents shallexer-
     cise the judgment and care under the clrcum-
     stances then prevliling which men of ordinary
     prudence, discrct$onand intelligence exercise
     in the management of their own affairs not in
     regard to speculation but in regard to the
     permanent disposttion of their funds, consider-
     ing the probable income therefrom as well as
     the probable safety~of their capital . . . .
     This amendment shall be self-enacting . . . .'
     After consideration of the statutes and regulations
in effect on August 5> 1958, the Attorney General concluded
in W-484  that the FHA insurance was not sufficient to
render the mortgages "guaranteed . . . in whole" for the
benefit of the Permanen,tUniversity Fund.
     The Attorney General has always recognized the general
effect of Section lla, Article VII of the Constitution of
Texas. In Attorney General's Opinion No. m-263   (December
31, 1956), it was stated:



                        -3805-
Honorable Preston Smith, page 3 (C-793 )


         "A consideration of the provisions of.
    Article 7, Sections 10, 11, 11(a),,12 and
    15 of the Constitution of Texas, shows quite
    clearly that the only change in our Consti-
    tution affected by the adoption of Article
    7, Section 11(a) was to increase the permis-
    sive investments of the Permanent University
    Fund. The sole purpose of the endowment or
    non-expendable fund is to produce revenue to
    maintain the institution endowed, and the
    new provision of the Constitution is merely
    to aid in the procurement of that objective
    by the broadening of the investment port-
    folio."
This statement was reiterated in Attorney General's Opinion
No. W-69 (March 18, 1957).
     After careful consideration of amendments to the Act
and the regulations promulgated thereunder, this office
consents to reconsider 'che,conclusionin WW-484 that FJJA
insured first lien mortgages are not eligible investments
for the Permanent University Fund. The Act has been changed
many times; therefore, for convenience all citations will be
to the provisions of the Act as found in Title 12, U.S.C.,
Sections 1701 et. seq.
      In W-484, portions of Section 204 of the Act (12 U.S.C.
Set . 1710) were quoted in order to outline the procedure re-
quired when a mortgage  has been foreclosed. Those portions
will again be quoted with the relevant changes thereto em-
phasized:
         "(a) I:nany case in which the mortgagee
    under a mortgage insured under section 1709
    of this title flection 203 of the Act 7shall have
    foreclosed and-taken possession of ths mortgaged
    property in acecrdanse with regulations of,
    and within a period to be determined by, the
    Commissicnez~or shall, with the consent of the
    Commissfo.ner,have otherwise acquired such
    property from the mortgagor after default, the
    mortgagee shaX. be entitled to receive the
    benefit cf the insurance as hereinafter pro-
    vided, upon (1) the prompt conveyance to the
    Commissioner of title to the property which


                        -3806-
Honorable Preston Smith, page 4 (C-793 )


     meets the requirements of rules and regulations
     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 mort-
     gagor 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
     conveyance and assignment . . . the Commissioner
     shall, subject to the cash adjustment hereln-
     after provided, issue to the mortgagee deben-
     tures having a total face value equal to the
     value of the mortgage and (subject to sub-
     section (e) (2) of this section) a certifi-
     cate of claim, as hereinafter provided. For
     the purposes of this subsection, the value of
     the mortgage shall be determined, in accord-
     ance with rules and regulations prescribed
     by the CommLssioner, 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 mort-
     gage, speciab assessments which are noted on
     the application for insurance or which become
     liens after the Wsurance of the mortgage,




                -   -
     insurance premiums, 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


                        -3807-
Honorable Preston Smith , page   5   (C-793 )


     account of the mortgage after either of such
     dates, and any amount received as rent or
     other Income from the property, less reason-
     able expenses incurred in handling the pro-
     perty, after ei,therof such dates
     And provided further, That with respect ;o
     mortgages whi.chare accep,tedfor insurance
     under Section 203(b) (2) (D) or under the
     second proviso of section 1713 (c) (2) of this
     title, or under section 1715e of this title,
     or with respect to any mortgage accepted for
     insurance under section 1709 of this title on
     or after August 2, 1954, 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 s.uchcost or $75 whichever is the
     greater: And provided further, That with res-
     pect to a mortgape accepted for insurance pur-
     suant to a commitment issued on or after Sep-
     tember 2, 1964, the Commissioner may include
     in debentures or in the cash payment an amount
     not to exceed the foreclosure, acquisition, and
     conveyance costs actually paid by the mortgagee
     and approved by the Commissioner        And pro-
     vided further, That where the claim'is paid in
     zn
     -.-,.        I_~ be included in the cash pay-
           there shall
     ment an amo,un,tegui,valentto the compensation
     for loss of debenture interest that would be
     included in computing debentures if suchim
     were being paid in debentures . . . .'I12 zT.S.C.,
     Section 1710(a) (Kmpk,asisadded).
     In 1958, a mortgagee who foreclosed and took possession
of the mortgaged property upon the mortgagor's default had
the right to receive payment of FHA insurance in the com-
bination of (1) .FHAdebantures, (2) cash up to $50 and (3)
a certificate of claim, As demonstrated by the changes in
the Act and discussed in greater detail, infra, the form
of payment of PHA insurance has changed considerably.
     In W-484,  Section 294(e) of the Act (12 U.S.C. Sec.
1710(e)!, which defines a certificate of claim, was used
as evidence that the tnta~lrace value of the debentures


                       -3808-
Honorable Preston Smith, Page 6 (C-793 )


plus the cash adjustment could possibly be insufficient to
make a mortgagee (the Permanent University Fund) whole when
a mortgage was foreclosed, That provision now reads:
          "(e) (1) Subject to paragraph (2), the
     certificate of claim issued by the Commissioner
     to any mortgagee shall be for an amount which
     the Commissioner determines to be sufficient,
     when added to the face value of the debentures
     issued and the cash adjustment paid to the mort-
     gagee, to equal the amount which the mortgagee
     would have received if, at the time of the con-
     veyance to the Commissioner of the property covered
     by the mortgage, the mortgagor had redeemed the pro-
     perty 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 proceedings, or the acquisi-
     tion of the mortgaged property otherwise, and the
     conveyance thereof to the Commissioner. Each such
     certificate of claim shall provide that there
     shall accrue to the holder of such certificate with
     respect to the face amount of such certificate,
     an increment at the rate of 3 per centum per annum
     which shall not be compounded. The amount to which
     the holder of any such certificate shall be en-    '
     titled shall be determined as provided in subsection
     (f) of thls section.

         (2)  A certificate of claim shall not be issued
    and the provisions of paragraph (1) of this sub-
    section shall not be applicable in the case of a
    mortgage accepted for insurance pursuant to a com-
    mitment issued on or after September 2, 1964."
    -(Emphasisadded).
Further, the FHA regulations provide:
                                           I
          "If the mortgage was accepted for insurance
     pursuant to a commitment issued on or after Sep-
     tember 2, 1964, no certificate of claim shall be
     issued.' 211C.F.R., Section 203.4:5(b). See also
     letter from FHA Commissioner to all approved mortgagees
     dated September 2* 1964 (64-10).



                        -3809-
Honorable Preston Smith, page    7   (c-793   1



     In wW-484 the protection afforded the Permanent
University Pond by the FHA in the event of default by
the mortgagor and foreclosure by the mortgagee was
examined. Today, the payment of insurance benefits is
somewhat different. First, the Act provides:
         "Notwithstanding any other provisions of
    this chapter with respect to the payment of
    insurance benefits, the Commissioner Is autho-
    rized, in his discretion, to pay in cash or In
    debentures any insurance claim or part thereof
    which Is paid on or after August 10, 1965, on
    a mortgage or a loan which was insured under
    any section of this chapter either before or
    after such date. If payment is made in cash,
    it shall be in an amount equivalent to the face
    amount of the debentures that would otherwise
    be issued plus an amount equivalent to the
    interest which the debentures would have earned,
    computed to a date to be established pursu%nt
    to regulations issued by the Commissioner.
    12 U.S.C., Section 1735d(a).
Further, the regulations provide:
          "If the application for insurance bene-
     fits is acceptable to the Commissioner, pay-
     ment of the insurance claim will be made in
     cash, in debentures or in a combination of
     both, as determined by t;e ;Ki,;siPoner at
     the time of the payment.       0 . a, Section
     203.400.
The present policy of the FHA is found in a letter from
the Commissioner to all approved mortgagees dated August
10, 1965 (65-g) that says on pages 5 - 6:
          "FHA is now authorized to settle all
     mortgage insurance claims in cash or deben-
     tures at the option of FHA. All claims re-
     ceived on and after September 1, 1965, will
     be paid in cash, unless the mortgagee speci-
     fically requests debentures when the claim is
     filed. A 90% partial settlement will be made
     within 5 days after the claim is received. The



                        -3810-
Honorable Preston Smith, page 8 (C-793 )


    final settlement will be made after receipt
    of fiscal data and title requirements. The
    partial and final settlement will include an
    interest allowance, comparable to the deben-
    ture rate, on the amount of the settlement.
    No cash remittances are to be made to FHA
    covering escrow deposits, undisbursed mort-
    gage proceeds, etc. These amounts will be
    retained by the mortgagee and offset in the
    claim settlement."
The formula for determining the amount of payment the FHA
will make is found in 24 C.F,R., Sections 20x.401-203.404.
     Should the,,mortgageeelect to accept debentures, the
debentures are        fully and unconditionally guarantee:
as to principal and &cerest by the United States
12 U.S.C., Section 1710(d). (Emphasis added). The'int&&t
rate on'debentures is established by the method set out in
12 U.S.C., Section 17150 and the regulations provide that:
          "Debentures shall bear interest from
     the date of issue, payable semiannually on
     the first day of January and the first day
     of July of each year at the rate in effect
     as of the date the commitment was issued,
     or as of the date the mortgage was endorsed
     for insurance, which ever rate is the higher
         .[on or after July 1, 1966, the effective
     rate is 4 5/8$-T." 24 C.F.R., Section 203.405.
Debentures mature twent years from the date of issuance.
24 C.F.R., Section 203.;:
                        06.
     The mortgagee now has ,theoption of (1) obtaining
a cash payment of benefits, or (2) requesting debentures
that are guaranteed by the United States. Even if the FHA
Commissioner's policy should change the mortgagee would be
paid in a combination of cash and debentures; the certifi-
cates of claim have been abolished by Congress. FHA in-
sured first lien mortgages, therefore, meet the constitutional
standard and are now eligible investments for the Permanent
University Fund, The mortgagee's option is to be exercised,
of course, by the Board of Regents under the prudent investor
standard set out in Section lla, Article VII of the Constitu-



                        -3811-
Honorable Preston Smith, page 9 (c-793)


ticn cf Texas. The answer to your first questlon is,
therefore, af?irmative.




     We have held, supra, that the Permanent University
Fund is authorized to invest in FRA insured first lien
mortgages. The following Funds can also be invested in
FHA insured first lien mortgages:
          (1) Permanent School Fund. Article VII, Section
     4 of the Constitution of Texas and Article 2669(d),
   j V.C.S.
          (2) State Retirement, Disability and Death
     Compensation Fund. Article XVI, Section 62(a) of
     the Constitution of Texas and Ar,ticle62!28a,Section
     7A, V.C.S.
                       eat er Retirement Fund. Article III,
     ,,t;k!    ika::dn4t:bhof the Constitution of Texas and
     A&icle   2922-1, Section 13(l), V.C.S.
     The authority of the Board of Regents of the University
of Texas, the S'ca,te
                    Board of Education, the State Board of
Trustees of the Employees Retirement System and the State
Board of Trustees or the Teacher Retirement System of Texas
(the agencies charged wi,thadministration and control of
each Fund) to c0ntrac.F:
                       f'orservicing of mortgages is not ex-
                              There is, however, no statutory
pressly provided by sta.t%.:.te.
prohibition.
     In Attornev Generalvs Gninion No. W-69, supra, it was
said with refer+znceto a proposed procedure for the purchase
and sale of corporate securities for the Permanent Univer-
sity Fund:
                                                  . .   .




Honorable Preston Smith, page 10 (C-793)



          "Article VII, Section 11(a), by its own
     terms, is self-enacting and the absolutely
     essential powers to carry the program into
     effect are necessarily conferred upon the
     Board of Regents by implication. The pay-
     ment of such required commissions, fees and
     taxes, before the delivery of the securities
     to the Permanent University Fund at the State
     Treasury, are costs of acquiring the securities
     and must be said from the Permanent Universitv
     Fund. This is the ordinary and customary busi-
     ness and accounting practice and the constitu-
     tional provision infers that the customary busi-
     ness procedures will be followed." (Emphasis
     added). See First National Bank v. Port Arthur,
     35 S.W.2d 258 (Tex. Civ. App. 1931, n.w.h.).
Since it is the customary business and accounting practice
for institutional mortgage investors to contract with
mortgage bankers for servicing of their investments, we
find that the above named agencies may so contract.
     Each Fund has been created pursuant to separate con-
stitutional and statutory provisions. Each Fund has a
separate set of statutes relating to its accounting aspects.
Each controlling agency has a certain degree of discretion
as to the investment of each Fund. See Attorney General's
Opinion No. C-70LI(June 7, 1966). Therefore, this office
does not deem it appropriate to approve any single contract
form for use by all agencies. We recommend that future ser-
vicing contracts be submitted to this office for approval
prior to execution.
     In answer to your second question, it is our opinion
that the Board of Regents of the University of Texas, the
State Board of Edu.cation,the State Board of Trustees of
the ,EmployeesRetirement System and the State Board of
Trustees of the Tea&m   Retirement System have the author-
ity to contrazt w:ithcorrespondents in various sections
of Texas for the servicing of FHA insured first lien mort-
gage loans.




                       -x313-
Honorable Preston Smith, page 11 (C-793)


                    SUMMARY
                    --m--m-
          FHA Insured first lien mortgages
     are eligible Investments for the Per-
     manent University Fund of the University
     of Texas.
          The Board of Regents of the University
     of Texas, the State Board of Education, the
     State Board of Trustees of the Employees Re-
     tirement System and the State Board of Trustees
     of the Teacher Retirement System  have the author-
     ity to contract for the servicing of FHA ln-
     sured first lien mortgages;  however, we recom-
     mend that future servicing contracts be submitted
     to this office for approval prior to execution.
                            Respectfully submitted,       '
                            WAGGONER CARR
                            Attorney General of Texas




RCF:vg
APPROVEDr
OPINION COMMITTEE
Ralph R. Rash, Chairman
M. Paul Martin
John W. Fainter, Jr.
Mark W. White
APPROVED FOR THE ATTORNEY GENERAL
By: T. B. Wright




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