Orrego v. US DEPT. OF HOUSING AND URBAN DEV., 88 C 1567.

• Decision Date: 07 December 1988
• Docket Number: No. 88 C 1567.,88 C 1567.
• Parties: Rolando ORREGO, Nikolaos Iakovos, Nurul Chowdhury, Leonie Amaker, and Marta Mendez, individually and on behalf of all other persons similarly situated, Plaintiffs, v. The UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD), Samuel R. Pierce, Jr., in his official capacity as Secretary of HUD, the Federal National Mortgage Association, the American National Bank and Trust Company of Chicago, as trustee under Trust No. 21438, the 833 Buena Joint Venture, an Illinois partnership, and Town Management Corporation, an Illinois corporation, Defendants.
• Court: U.S. District Court — Northern District of Illinois

701 F. Supp. 1384

Rolando ORREGO, Nikolaos Iakovos, Nurul Chowdhury, Leonie Amaker, and Marta Mendez, individually and on behalf of all other persons similarly situated, Plaintiffs, v. The UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD), Samuel R. Pierce, Jr., in his official capacity as Secretary of HUD, the Federal National Mortgage Association, the American National Bank and Trust Company of Chicago, as trustee under Trust No. 21438, the 833 Buena Joint Venture, an Illinois partnership, and Town Management Corporation, an Illinois corporation, Defendants.

No. 88 C 1567.

United States District Court, N.D. Illinois, E.D.

December 7, 1988.

William P. Wilen, Daniel J. Burke, Alicia Alvarez, Legal Assistance Foundation of Chicago, (Burke now with Chicago Community Development Corporation), Leslie Ann Jones, Edward Feldman, Northwestern University Legal Clinic, James P. Chapman, Chicago, Ill., for plaintiffs.

Anton Valukas, U.S. Atty., Linda A. Wawzenski, Deputy Chief, Civil Div., U.S. Dept. of Justice, Chicago, Ill., Kim Kendrick, Trial Atty., John W. Herold, Asst. Gen. Counsel, U.S. Dept. of HUD, Washington, D.C., for defendant U.S. Dept of HUD.

Ronald Butler, James I. Rubin, Ellen M. Babbitt, Sue Payne, Kevin J. O'Brien, Butler Rubin Newcomer Saltarelli & Boyd, Chicago, Ill., for private defendants.

Edna Selan Epstein, Shalom L. Kohn, Robert J. Harris, Sidley & Austin, Chicago, Ill., for Fannie Mae.

MEMORANDUM AND ORDER

MORAN, District Judge.

For the last half century Congress has made periodic efforts to provide housing assistance to the nation's low and moderate income families. Congressional measures in large part have been incremental, springing from historical contexts that present pending crises. Federal endeavors began in response to widespread mortgage foreclosures, the drying up of mortgage credit and the lack of construction activity created by the "great depression." Congress enacted the National Housing Act of 1937 "to remedy ... the acute shortage of decent, safe, and sanitary dwellings for families of low income." National Housing Act, ch. 896, § 1, 50 Stat. 888 (1937). This Act established a Federal Housing Authority (now called the Department of Housing and Urban Development ("HUD")) to oversee the disbursement of funds and loans for the development of low rent housing and slum clearance projects.

In 1949 Congress broadened the focus of the nation's housing objectives to reach the "goal of a decent home and a suitable living environment for every American family." S.Rep. No. 84, 81st Cong., 1st Sess., reprinted in 1949 U.S.Code Cong. & Admin.News 1550, 1559. By the 1960s, however, Congress had determined that a housing gap existed: millions of middle-income families were unable to finance the purchase of homes but were nonetheless not so poor as to be entitled to public housing. To develop housing for these families Congress passed the National Housing Act of 1961. Following a policy goal enunciated in 1949 to stimulate private enterprise to perform "the major part of the task," see id. at 1559, the 1961 Act provided a temporary and experimental measure creating incentives for the private sector to fill the housing void.

The 1961 Act expanded the reach of § 221(d)(3) of the National Housing Act ("NHA"), which had originally provided services to persons displaced by urban renewal and other governmental activities. See 12 U.S.C. § 1715l. The "(d)(3) program," as it is commonly known, encourages private development of housing for moderate and low income individuals by insuring low interest mortgages for owners who construct and maintain multifamily dwellings. The mortgages bear a market rate of interest during the construction of the building and thereafter bear a below-market rate of approximately 3 per cent. Other incentives are provided including insurance against default, high percentage mortgages with small amounts of equity capital, and various tax deductions and offsets.

Under the Act HUD is required to govern the operation, administration and rental rates of (d)(3) buildings for the life of the mortgages. Most of these mortgages are for a period of 40 years. Federal regulations and agreements, however, gave private developers the right to privatize their buildings by prepaying the full amount due on the mortgage after 20 years. See 24 C.S.R. § 221.524(a).¹

In 1987 many (d)(3) buildings became eligible for pre-payment. By then, the (d)(3) program was no longer active as a source for development of new housing. Bills were introduced in the House (H.R.4) and the Senate (S.825) containing provisions relating to the prepayment of federally-insured multifamily mortgages. During the spring and summer of 1987 Congress held hearings on the proposed legislation. See Housing, Community Development and Homelessness Prevention Act of 1987: Hearings on H.R.4 Before the U.S. Congress House Comm. on Banking, Finance and Urban Affairs, 100th Cong., 1st Sess. (March 1987) ("House hearings"); Declining Supply of Low and Moderate Income Rental Housing, Before U.S. Senate Comm. on Banking, Housing and Urban Affairs, 100th Cong., 1st Sess. (June 5, 1987) ("Senate hearings").

On the issue of prepayment of federally-insured housing complexes, the House subcommittee was informed that project-based programs (including Sections 8 and 236 housing, as well as (d)(3) housing) would — at generous approximations — see a 50 per cent reduction by the year 2005 (House hearings at 407 (testimony of Neal Curtin, Deputy Directory, Resources Community and Economic Development Division, General Accounting Office)). Prepayment was predicted to occur most heavily in areas where private owners would expect greater returns — in strong market areas valuable for commercial development or upscale housing.² Subcommittee Chairman Henry Gonzalez noted that 3 million low and moderate income families could be affected by prepayment, an eventuality that he considered the "next contributor to homelessness" (House hearings at 461).³

Anticipating a crisis in the availability of low and moderate income housing, Congress passed the Emergency Low Income Housing Preservation Act of 1987 ("Emergency Preservation Act").⁴ The initial draft of that Act — one step in a very public process — emerged from the Conference Committee on November 6, 1987. It expressly provided for an effective date of November 1, 1987. After subsequent amendments it was passed by the Senate and House of Representatives on December 21, 1987.⁵ The Act requires (d)(3) owners desiring to prepay their mortgages to develop a plan of action for terminating low income affordability restrictions. The Act further conditions acceptance of prepayments on HUD's determination that low income tenants will not be unduly burdened.⁶

The Act was not signed into law by the President until February 5, 1988. Between December 21, 1987 and February 5, 1988, three or four of the 73 owners of the various (d)(3) buildings around the nation that reached the 20-year threshold between November 1, 1987 and February 5, 1988, attempted to privatize by prepayment. One such prepayment is the subject of this litigation.

Plaintiffs are tenants in a federally-assisted moderate and low income apartment building. The owner of the building, private defendant 833 Buena Joint Venture ("Joint Venture"), in an attempt to discontinue federal regulation of the building, prepaid to HUD the remaining amount due on its mortgage. Plaintiffs filed this action as individuals and as members of a class, seeking an order that would void the prepayment transaction and cause HUD to resume federal regulation. Currently before the court are plaintiffs' motion for class certification and cross-motions for summary judgment. We certify plaintiffs' class, grant summary judgment to the Federal National Mortgage Association, deny the remaining defendants' motions for summary judgment and grant summary judgment to plaintiffs.

Facts Specific to the Instant Litigation

The material facts of this case are not in dispute. 833 W. Buena is a 209-unit multifamily dwelling complex located in the Uptown community of Chicago, Illinois, that was constructed and maintained as a (d)(3) building. Its original owner received a federally-insured low interest mortgage and entered into a regulatory agreement with HUD on March 8, 1966. The American National Bank & Trust Company of Chicago (ANB), as mortgagor under a trust agreement, executed a 40-year secured note and mortgage in the sum of $2,700,000. The note carried an interest rate of 5¼ per cent per annum during construction, reduced to 3 3/8 per cent after final endorsement by the Federal Housing Commissioner on January 4, 1968. The note provided that

the debt evidenced by this note may not be prepaid either in whole or in part prior to the final maturity date thereof without the prior written approval of the Federal Housing Commissioner except that a maker which is a limited distribution entity may prepay without such approval after 20 years from the date of final endorsement of this note by the Federal Housing Commissioner.

The parties agree that the "limited distribution entity" language applies to the owners of 833 W. Buena.

The mortgage and note were originally assigned to defendant Federal National Mortgage Association ("Fannie Mae"), an entity within HUD responsible for the purchase and sale of mortgages insured under the NHA. In September 1968 Congress partitioned Fannie Mae into two separate entities, see 12 U.S.C. § 1717(a)(2). Fannie Mae became a privately-owned and HUD-regulated corporate body responsible for conducting the secondary market operation of the old Fannie Mae, and a new entity, the Government National Mortgage Association ("Ginnie Mae" or "GNMA") a federally-owned and -controlled agency, assumed its special assistance, management and liquidation functions. Following the partition, the 833 W. Buena mortgage and note became the property of...