Housing Study Group v. Kemp, Civ. A. No. 89-0244.

Citation732 F. Supp. 180
Decision Date06 February 1990
Docket NumberCiv. A. No. 89-0244.
PartiesHOUSING STUDY GROUP, et al., Plaintiffs, v. Jack F. KEMP, Secretary of Housing and Urban Development, et al., Defendants.
CourtUnited States District Courts. United States District Court (Columbia)

Robert C. Seldon, John E. Vigstadt, Joseph A. Kijewski, Krooth & Altman, Washington, D.C., for plaintiffs.

Mark Nagle, Asst. U.S. Atty., Washington, D.C., for defendants.

MEMORANDUM OPINION

JOYCE HENS GREEN, District Judge.

Plaintiffs ABG Financial Services, Inc. ("ABG") and Centennial Mortgage, Inc., ("Centennial"), two active mortgage bankers approved by the United States Department of Housing and Urban Development ("HUD") to be Federal Housing Administration ("FHA") coinsuring lenders with authority to provide financing and issue mortgage insurance for qualified multifamily housing projects, and Housing Study Group, a trade association of which ABG and Centennial are members, bring this suit for declaratory and injunctive relief against Jack Kemp, Secretary of HUD ("Secretary"), C. Austin Fitts, Federal Housing Commissioner ("Commissioner"), and Peter H. Monroe, Deputy Federal Housing Commissioner seeking to enjoin defendants from interfering with the operation of the coinsurance programs established under Section 244 of the National Housing Act, as amended, 12 U.S.C. § 1715z-9.

The parties appeared before the Court this date for a hearing on plaintiffs' motion for a temporary restraining order. For the following reasons, the motion is denied.

I.

The National Housing Act, originally promulgated in 1934, and amended on numerous occasions since then, 12 U.S.C. § 1701, et seq., has as one of its primary purposes the promotion of the construction and availability of low and moderate income housing. Included in the original legislation was the creation of the Federal Housing Administration ("FHA"), to serve as one of the agencies charged with primary responsibility for the effectuation of the Act's purposes.1

The principal objectives of the National Housing Act carried out by the FHA are providing an adequate home financing system by insurance of housing mortgages and credit and exerting a stabilizing influence on the mortgages market.2 The FHA does not make loans itself; rather, it operates programs to insure private lenders against loss on mortgage loans used to finance the construction, rehabilitation, and improvement of eligible projects, which include single and multifamily residential properties, mixed use commercial and residential projects, land development projects, and group practice and other health care facilities.3

In order to execute each of these programs, Congress authorized the Secretary of HUD to insure the mortgage loans by which eligible projects were acquired, refinanced, constructed, or rehabilitated.4 At this time, the FHA itself fully insured eligible mortgage loans on section 221(d), 223(f), and 232 programs. Comprehensive regulations were utilized by the FHA in administering the full insurance program.5

In 1974, Congress vastly altered this insurance scheme by promulgating section 244 of the National Housing Act which authorized the Secretary to implement the coinsurance program. 12 U.S.C. § 1715z-9. Section 244 provides, in relevant part:

The Secretary, upon request of any mortgagee and for such mortgage insurance premium as he may prescribe ... may insure and make a commitment to insure under any provision of this chapter any mortgage ... otherwise eligible ... pursuant to a co-insurance contract providing that the mortgagee will—(1) assume a percentage of any loss on the insured mortgage ... and (2) carry out ... such functions as the Secretary, pursuant to regulations, shall approve as consistent with the purposes of this chapter.

Id.6

Two features of the coinsurance program are of particular importance here. The first is the sharing of risk of loss between the FHA and the coinsuring lender in the event of a default on a coinsured mortgage loan. The second is the authority and autonomy of approved coinsuring lenders to process applications for coinsured mortgage loans and to make commitments for such loans for eligible projects.7

In response to the authority delegated by Congress to promulgate rules and regulations necessary to carry out his functions, including administering the coinsurance program,8 the Secretary issued regulations implementing the coinsurance program pursuant to notice and comment rulemaking as required by the Administrative Procedure Act, 5 U.S.C. § 553. These regulations are currently codified in 24 C.F.R. Parts 251, 252, and 255.

Since the creation of the coinsurance program, HUD, the Commissioner, and other government officials have commented on the success of the program.9 Despite this apparent success, the reputation of the coinsurance program was seriously damaged on September 16, 1988, when the Government National Mortgage Association ("GNMA") declared DRG Funding Corporation ("DRG"), the largest coinsuring lender, in default on its obligations.10 GNMA seized DRG's portfolio, effectively removing DRG's authority to serve as a coinsuring lender. On March 22, 1989, HUD suspended DRG from participating in any federal program or HUD procurement contract.11

Secretary Kemp testified before the Subcommittee on Employment and Housing of the House Committee on Government Operations on July 11, 1989 and acknowledged that HUD was responsible for the situation which led to DRG's default:

It has become clear that HUD's monitoring and enforcement of the multifamily coinsurance program has been substandard and inexcusable. In December of last year, the Inspector General reported serious problems with the underwriting practices of DRG, HUD's largest coinsurer, with a portfolio of over $1.4 billion in approved loans. In March, I suspended DRG from doing business with the Department. My action was essential. DRG defaults had equalled $500 million, and they had earlier been suspended by GNMA. There is no excuse that this action was not taken sooner.12

The following day, the Secretary gave the same testimony to the House Committee on Banking, Finance, and Urban Affairs.13

Since the date DRG was suspended until January 1, 1990, HUD placed four other approved coinsuring lenders on probation and suspended the authority of six others.14 None of these coinsuring lenders is a member of the Housing Study Group or a party to this action.15 As of January 1, 1990, approximately 44 coinsuring lenders retained their full approval from HUD.16

As a result of these occurrences, HUD found it appropriate to consider reforms to the coinsurance programs and industry as a whole. Plaintiff Housing Study Group asserts that it participated in this process by meeting repeatedly with HUD officials and providing testimony to Congressional Committees and Subcommittees. In addition, the Housing Study Group submitted written proposals for reform to HUD in February and May of 1989.

On May 5, 1989, HUD issued Coinsuring Lender Letter No. 89-4, which established a 120-day evaluation period for the coinsurance programs, increased monitoring of approved coinsuring lenders, and announced a moratorium on new lender approvals. Still, HUD noted that it was committed to the coinsurance programs as "a major vehicle to deliver the multifamily mortgage insurance program."17

In January, 1990, HUD took three specific actions, which according to plaintiffs "marked a dramatic departure from HUD's previous actions and statements,"18 and triggered the instant lawsuit. First, on January 16, 1990, the Commissioner issued Coinsuring Lender Letter No. 90-1, which required HUD reviews of all coinsurance mortgage applications prior to the issuance of any binding commitments and prohibited coinsuring lenders from issuing loan commitments before receiving written notification from HUD that it had "reviewed and found to be acceptable the underwriting and related loan commitment determinations made by the lender."19 The Letter contained no standards by which the review would be conducted.

The following day, January 17, 1990, Secretary Kemp issued News Release No. 90-009, announcing his decision to end coinsurance. Declaring the program structurally flawed, fundamentally unsound, and administratively unfixable, Kemp stated that "a careful and prolonged examination of all the available options and the potential consequences of each to the American public has led to the prudent management decision to end coinsurance and rededicate the Department to an enhanced program of full insurance."20 The News Release reiterated that all approved coinsuring lenders were required to submit "all potential loans to the Department for a full precommitment review of underwriting."21

On January 23, 1990, the Commissioner issued Coinsuring Letter No. 90-2, which advised coinsuring lenders that they could not issue binding mortgage loan commitments after January 16, 1990, unless they received approval from HUD and the appropriate field office.22 Loan commitments issued before January 16, 1990 would not be honored unless HUD made a determination that the commitments were "legally binding."23 Loan commitments issued between January 16, 1990 and January 23, 1990 would not be honored without written approval from HUD headquarters, which the Commissioner advised would take approximately 45 working days. Like Coinsuring Letter 90-1, no standards of review were set forth.

Plaintiffs filed the instant complaint on February 2, 1990, alleging that these actions constitute attempts to amend the coinsurance regulations which were done without observing the rulemaking procedures required by Section 4 of the Administrative Procedure Act ("APA"), 5 U.S.C. § 553, or the Congressional layover and wait provisions contained in HUD's enabling legislation. 42 § 3535(o).24 In addition, plaintiffs contend that defendants actions are "arbitrary and capricious" in violation of section 10 of the APA, 5 U.S.C. § 706 in...

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