                           AURTIN   ~~.-J%:xan



                        February 29,    1960



Honorable Jesse James                  Opinion No. WW-809
State Treasurer
Austin, Texas                          Re:.Whether "Capehart Notes"
                                           are eligible for pledge
                                           to the Treasurer as se-
                                           curity for deposit of
                                           State funds in a State
Dear Mr. James:                            Depository.

         You request our opinion on:

              Whether Deed of Trust notes, often
         called 'Capehart Notes', issued under
         the provisions of the National Housing
         Act are eligible for pledge to the
         Treasurer of the State of Texas as se-
         curity for deposit of State funds in a
         State Depository?"

          A "Capehart Note" arises from construction activi-
ties under the Armed Services Housing and Insurance Act of
1955, S. 1501, 84th Cong., 1st Sess., otherwise known as the
Capehart Act, which provides a method for financing the con-
struction of housing for military personnel of the Armed
Services of the United States. 42 U.S.C.A. 1594, 12 U.S.C.A.
114833. 69 Stat. 646.

         The actual mechanics of the Capehart financing pro-
cess are complex, but substantially they are these:

         The Act authorizes the Secretary of Defense or his
designee to contract with corporate builders to erect hous-
ing units on land under control of the military.

         To construct the project the corporate builder first
obtains from private, non-governmental sources funds in the
amount of its bid through the medium of a mortgage on a long-
term lease from the Secretary.
Hon. Jesse James, page 2 (WW-809)



         Upon the completion of construction and as soon
as the unit is available for occupancy as determined by
the Federal Housing Commissioner the corporate builder
obtains from a private lending institution a loan secured
by a mortgage not exceeding a term of twenty-five years on
the lease and building.

          Cut of those funds the corporate builder retires
the construction fund mortgage  and the completed project,
subject to the mortgage encumbrance thereupon, is conveyed
to the Secretary along with, the capital stock of the builder
corporation.   Thereafter the military operates and main-
tains the housing units. Under the terms of the Act the
military pays the principal and interest on the mortgage   by
withholding quarters allowances of personnel occupying the
units.

         The Capehart Act authorizes the Federal Housing
Commissioner to insure this mortgage.

         Additionally, the Act authorizes the Secretary of
Defense or his designee to:
              I, 0 D *
                     guarantee the payments 'of notes
         or other legal instruments required by the
         Commissioner of such mortgagors; to make
         payments thereon . .~ .II Section 403(c),
         69 Stat, 652, 42 U.S.C.A. 1594(c).

         In practice the respective Secretary executes a
guaranty whereby his Department:

              111 n. a . guarantees to the payee
         of said note (said payee being herein-
         after referred to as the 'mortgagee') and
         to the Federal Housing Commissioner, as
         their interests may appear, the payment,
         in accordance with the terms of said note,
         of said advances and interest thereon
Hon. JesselJameg,   page. 5 ~(m-,SG9)



              (2) "* . . will, subject to the con-
         ditions stated in the foregoing guarantee,
         make each periodic payment becoming due
         to the mortgagee on said note . . . in
         accordance with the terms thereof without
         any requirement that the mortgagee shall
         have made a prior demand to the mortgagor-
         builder for such payment."

         The only conditions contained in the "foregoing
guarantee" are:

             1.  "Final endorsement by the Federal
         Housing Commissioner of the note for mort-
         gage insurance; or

             2. Termination of the housing contract
         for the convenience of the Government prior
         to the completion of the project."

         The net effect of this legal and financial maze is
to make the United States Government the mortgagor.  Under
the Capehart Act and by the tenor of the guaranty by the
military branch, the Government is the obligor and pri-
marily responsible for the payment of the principal and
interest of the obligation.

         The only legal difference, if any there be, be-
tween this and U. S. Treasury borrowing is that the obli-
gation assumes the cloak of a mortgage debt of the mili-
tary department instead of a bond issue by the Treasury.

         Article 2529, V.C.S., provides that ". . . bonds
and certificates and other evidences of indebtedness of the
United States . . ." shall be eligible for pledge as col-
lateral by State depositories to secure the deposit of
State funds.
         You are advised that legally conforming "Capehart
Notes" are "other evidences of indebtedness of the United
States" as contemplated by Article 2529, supra, and are
eligible for pledge to the State Treasurer as security for
deposit of State funds in a State Depository.
Hon. Jewe Jknee, page 4 (m-a091



                          .i!g!aY+
            .Legallyconfoting n  Capehart'ipotee?
         are al$gible under Article 2529!~Y.C.S..
         fix pledge to the State Treaeurer as ye-
         curity'for depoeit of lltatefunds in a,
         State~Depository.

                               Wry   truly,*oura,

                               WILIiwILSON




oPIltIoNconnITqmr
.W.V. Geppert; Chairmen


Fred We&&thin
John.Reevea
William 1. All@n
Joe Carroll
 REVII#~D POR TEE ATTORWEN GRNRRAC
 Byr Leonard ~Paecmore
