New York Guardian Mortgagee Corp. v. Cleland

• Citation: 473 F. Supp. 409
• Decision Date: 03 April 1979
• Docket Number: No. 78 Civ. 3649.,78 Civ. 3649.
• Parties: The NEW YORK GUARDIAN MORTGAGEE CORP., Plaintiff, v. Max CLELAND, Administrator of the Veterans Administration, and the Government National Mortgage Association, Defendants.
• Court: U.S. District Court — Southern District of New York

473 F. Supp. 409

The NEW YORK GUARDIAN MORTGAGEE CORP., Plaintiff, v. Max CLELAND, Administrator of the Veterans Administration, and the Government National Mortgage Association, Defendants.

No. 78 Civ. 3649.

United States District Court, S. D. New York.

January 8, 1979.

On Motion to Reargue April 3, 1979.

Milgrim, Thomajan & Jacobs, New York City, for plaintiff; George L. Graff, New York City, of counsel.

Robert B. Fiske, Jr., U. S. Atty., S. D. New York, New York City, for defendants; David M. Jones, Asst. U. S. Atty., Jane M. Edmisten, Asst. Gen. Counsel, Finance Dept. of Housing and Urban Development, Washington, D. C., Kathleen D. Koch, Atty. Advisor, Dept. of Housing and Urban Development, of counsel.

LASKER, District Judge.

The present case comes before the court on cross-motions for summary judgment. The New York Guardian Mortgagee Corp. ("plaintiff" or "Guardian") and the Government National Mortgage Association ("defendant" or "GNMA") seek a declaration of their rights and duties in connection with the distribution of certain funds to holders of "modified pass-through" securities issued by Guardian under GNMA's "Mortgage Backed Securities Program."¹

I. The Statutory Scheme

During 1968, Congress, in an effort to attract private capital into housing, created GNMA as a wholly-owned government corporation (12 U.S.C. § 1717(a)), and empowered it to implement what has come to be known as the "Mortgage Backed Securities Program" (12 U.S.C. § 1721(g)). In connection with this program, GNMA was authorized to issue securities "based on and backed by" a pool of mortgages guaranteed by one of several government agencies, including the Veterans Administration ("VA"), and to authorize qualifying private parties to issue such securities. Id. GNMA was further authorized to guarantee with the full faith and credit of the United States the timely payment of principal and interest falling due on such securities. Id.

The general purpose of these provisions was to foster a secondary market for home mortgages by providing a safety and liquidity not available to those investing directly in mortgages and to insulate GNMA investors from problems inherent in the management of mortgage portfolios. See 12 U.S.C. § 1716 (1976); S.Rep.No.1123 at 80 (90th Cong. 2d Sess.); H.Rep.No.1585, 2 U.S.Code Cong. & Admin.News, pp. 2873, 2944-45 (1968); Conf.Rep.No.1785, Id. at 3053, 3063; 114 Cong.Rec. 15,236 (1968) (Remarks of Sen. Bennett); Id. at 20,063.

Federal regulations establish two types of mortgage backed securities: "straight pass-through" securities, which provide for the payment by the issuer to the security holders of "principal and interest generated by the underlying pool of mortgages as collected" and "modified pass-through securities", which "provide for such payment, whether or not collected, of both specified principal installments and a fixed rate of interest on the unpaid principal balance, with all prepayments being passed through to the holder." 24 C.F.R. § 390.5 (1978) (emphasis added). The present lawsuit concerns modified pass-through securities. Both types of securities must specify, on an accompanying schedule, the dates by which payments are to be made to the holders. Id.

The mortgage backed securities program operates as follows. A financial institution or mortgage servicing company wishing to participate must assemble or acquire a pool of government insured or guaranteed mortgages. GNMA then enters into a standard form "Guaranty Agreement" with the issuer (this Guaranty Agreement is set forth at Appendix 19 to the GNMA Mortgage Backed Securities Guide, GNMA 5500.1 Rev. 4 (hereafter referred to as "GNMA Guide")), under which, inter alia, GNMA agrees to guarantee timely payments of principal and interest as required by the terms of the securities (Guaranty Agreement § 6.01), and the issuer agrees to remit in a timely manner all payments required by the terms of the securities. Guaranty Agreement § 4.01. Should the issuer fail to make timely payments as required, the security holder's sole recourse is against GNMA (Id. § 7.01). However, GNMA may treat the issuer's failure to make required payments as an event of default under the Guaranty Agreement (§ 8.01), and this provides GNMA with the option of extinguishing the issuer's interest in the pooled mortgages² and becoming owner of those mortgages "subject only to the unsatisfied rights of the holders of the securities . . .." 12 U.S.C. § 1721(g) (1976); Guaranty Agreement § 8.05.

II. Facts

The forces which ultimately led to the present lawsuit were set in motion between January 1, 1970 and June 30, 1972, during which time Eastern Service Corporation ("Eastern") assembled several pools of mortgages and entered into a series of Guaranty Agreements with GNMA, which entitled Eastern to issue securities backed by the mortgage pools and also to receive service fees for administering them. In return, Eastern assumed the obligations of an issuer of "modified pass-through" securities. Among the mortgages which comprised Eastern's pools, some were guaranteed by the Veterans Administration.

In late April, 1975, Eastern assigned its rights under the mortgages and the Guaranty Agreements to Regency Equities Corporation ("Regency"), a subsidiary of Guardian, the plaintiff here, and Regency assumed Eastern's obligations as issuer. The assignment was approved by GNMA on July 7, 1975, and VA was duly notified.

At the time of this assignment, some of the many mortgages in the eleven assigned pools were involved in state foreclosure proceedings which had been instituted by Eastern. However, subsequent claims on the VA guaranties underlying these mortgages were made by Regency, as assignee of Eastern's rights under the Guaranty Agreements. The VA responded to these claims in a letter dated August 18, 1975, in which it stated that claims on these guaranteed mortgage loans (hereinafter the "Eastern loans") would not be paid to Regency, since Regency was "not a true `holder in due course' on date of assignment of the mortgages." After some inquiries, Regency received a second letter, dated May 5, 1976, which stated that the claims cited by Regency had been "offset against the amount due the Veterans Administration." Following certain proceedings not relevant here between Eastern and the United States Government,³ Guardian, which by that time had become assignee of Regency's rights under the Guaranty Agreement,⁴ renewed its efforts to obtain payment on the VA guaranties. The VA, in a letter dated July 11, 1978, stated that, since Eastern had been the holder of the mortgages at the time of their foreclosure, it was deemed by the VA to be the "only proper payee" on the Eastern loan guarantees. Any holder that accepted assignment of a mortgage following its foreclosure "did so at its own peril and would not be recognized as a holder in due course" by the VA. Furthermore, the VA noted that it had demanded reimbursement from Eastern for "losses incurred by the administrator as a result of claim payments made on certain loans originated by Eastern which were found to be tainted." When Eastern failed to respond to the VA's demands, the VA "offset"⁵ the monies payable to Eastern on the guaranty claims now asserted by Guardian against the amounts which the VA claimed Eastern owed to it.

It should be noted that throughout this prolonged dispute between Guardian (and its predecessors in interest) and the VA, Guardian had advanced to security holders from its own funds scheduled payments of principal and interest arising from these foreclosed mortgages as they fell due. This was consistent with Guardian's view of its obligations with respect to defaulted mortgages as set forth in 24 C.F.R. § 390.5(a). However, GNMA, after being informed of the VA's disposition of Guardian's guaranty claim, notified Guardian in a letter dated July 18, 1978 that, because the Eastern loans had been "liquidated" and "because of the VA's determination that it will not make payments in connection with the loans", Guardian's duty as issuer of the securities was to pay to the security holders the full unpaid balance of the Eastern loans. Fulfillment of this duty, GNMA stated, was "essential to Guardian's continued participation and good standing in the GNMA Mortgage-Backed Securities Program."

III. Discussion

Although Guardian contests the VA's asserted "offset", its propriety is the subject of separate claims against the VA and is not at issue here.⁶ What is at issue is whether, at this present juncture, Guardian is obliged to advance from its own funds a lump sum payment to security holders representing the unpaid balance remaining due on the loans.

Accordingly, Guardian seeks a declaration by this court that its obligation to make advances of uncollected payments to GNMA security holders is limited to the amounts set forth in the monthly payment schedules provided for under the terms of the securities. Guardian contends that it is only obliged to make prepayments (including proceeds from recoveries on guaranties) when those prepayments are actually received by it, and not when, as here, the only "prepayment" made was an accounting offset for the benefit of a third party rather than an actual payment in hand.

A. GNMA's Claim

GNMA maintains that regardless of the outcome of Guardian's pending action against the VA, Guardian has an immediate duty as issuer to advance from its own funds the unpaid balance of the Eastern loans. In the present case, GNMA claims, this duty was ripened by foreclosure of the mortgages coupled with VA's assertion that it had satisfied its guaranty obligation by set-off. While GNMA concedes that Guardian has a right to try to enforce its guaranties against the VA, it maintains this is purely a collection matter between an issuer and a guarantying agency and does not affect the duty of the issuer to make immediate payments to holders. This must be so in the present...