Office of the Assistant Secretary for Housing-Federal Housing Commissioner; Notice of Sale of HUD-Held Multifamily Mortgage Loans

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

[[Page 18653]]

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

[[Page 18654]]

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