Carolyn Betts, Esq.

Take a deep breath. This isn’t that hard, really, although even a lot of lawyers get "mortgagor" and "mortgagee" mixed up. There are all sorts of anecdotes around HUD about high-level appointees coming in to the department and taping "borrower = mortgagor, lender = mortagee" to the little sliding shelf that pulls out of the old desks, so that in a pinch they could remind themselves which was which.

A "mortgage" is one of the documents for a secured loan on real estate. There is a note that says, in essence, "IOU $x at y% interest over Z years, payable monthly in installments of $U." The mortgage is the document that says "if the borrower doesn’t pay as required under the note, the lender can foreclose on the property, sell it and apply the proceeds to pay the borrower’s full liability under the note." The mortgage is filed in the local real estate records so that anyone who is interested in buying the property, or making a loan secured by the property, knows that someone (the lender) has a prior interest that will come ahead of them. The borrower "makes" the mortgage, so he or she is the mortgagor. The lender takes the mortgage, so it is the mortgagee.

"How can you sell a loan? Isn’t a loan a liability?" you ask. When we speak of selling a mortgage loan, what we mean is that the lender is selling the note and its interest in the mortgage to the purchaser of the loan, so that the borrower has to make his or her payments to the buyer of the mortgage loan. The loan is a liability to the borrower, but an asset to the lender.

So HUD is a mortgage lender, right? Well, not exactly. In most cases, HUD (through the Federal Housing Administration, or "FHA") just issues guarantees of loans made by conventional lending institutions like banks and savings and loans. The guarantee issued by FHA says to the lender that if the borrower defaults on the loan, the lender can "put" the loan back to HUD and be paid some or all of the amount of outstanding principal and interest due on the loan. When that happens, HUD, through FHA, pays off the old lender and then stands in the shoes of the lender, collecting loan payments, foreclosing on the property or otherwise resolving the loan. Did you know that if FHA were a private company, it would be the largest insurance company in the world? The chief executive officer of this erstwhile insurance company is an Assistant Secretary of Housing who holds the title of FHA Commissioner. The FHA Commissioner, appointed by the President, is responsible for a portfolio of approximately [$300 billion]. Some of this portfolio consists of assets -- mortgage loans HUD has acquired as the result of claims under FHA guarantees (or property acquired by foreclosing on such loans) and some mortgage loans that lenders are allowed to put back for reasons other than default. The other part of FHA’s portfolio is contingent liabilities in the form of guarantee obligations on performing mortgage loans. FHA also has cash from mortgage guarantee fees paid by the borrowers under FHA-guaranteed loans. If net claims (amounts HUD recovers on the loans as lender minus the guarantee amount) are greater than mortgage guarantee premiums, HUD loses money. If net claims are less than mortgage guarantee premiums, HUD makes money. If HUD loses money, you, as a taxpayer, make up the difference.

Now, HUD, through its FHA portfolio, has billions of dollars worth of mortgage loans. It has several choices what to do:

    use HUD field office personnel to take on responsibilities of a mortgage lender in sending bills to the borrowers, collecting payments, foreclosing on properties, paying property insurance premiums, etc.
    pay third party contracting companies to take on mortgage lending responsibilities with respect to the mortgage loans
    sell the mortgage loans in the capital markets to financial institutions that will take on the responsibilities of a mortgage lender.
You may have heard that there has been a lot of pressure from Congress to downsize HUD. HUD does not have enough personnel to handle these responsibilities. So, in recent history, HUD has selected option (2) and employed third parties to carry out most of the loan collection and servicing activities. And, historically, in its multifamily portfolio of loans, for example, HUD’s record of recoveries on defaulted loans is approximately 35%. This means that for every dollar of loan that has been "put back" to HUD under a guarantee, HUD has lost $.65.

In 199[4?], HUD, through a competitive bidding process, hired Hamilton to advise FHA on how to best dispose of its mortgage loan portfolio in light of the fact that there were so many loans, HUD staff was not able to keep up. Hamilton advised HUD to try a loan sales program in which HUD auctioned pools of loans in sealed bid auctions open to any potential purchaser willing to pay the nominal costs of providing loan information for the bid. The mortgage loan sale program, from the perspective of the taxpayer, was a resounding success. On the multifamily portfolio, HUD started recovering [75 –90%] instead of 35%.

The HUD loan sale program was discontinued when Hamilton’s advisory contract was terminated in October, 1997.