[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]]
_______________________________________________________________________
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 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
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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
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
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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
