WASHINGTON -- The Department of Housing and Urban Development on Oct. 20 will hold the third in a series of auctions of federally insured 40-year loans under its Section 221 multifamily housing program.
The department will accept telephone bids for 77 mortgages with a combined unpaid principal balance of $50.6 million, said Russell T. Davis, managing director of the Hamilton Securities Group Inc., financial adviser to the department for the auctions.
Investors may choose to bid on the group as a whole or submit bids for subsets, Davis said. The department will announce on Oct. 21 which bids it has accepted. The loans carry interest rates of 6% to 8.5%.
The loan sales are permitted under a 1990 law that was enacted because lenders holding the mortgages were expected to start exercising put options and turn the loans back to HUD. Allowing private investors to buy the loans, many of which were financed with tax-exempt bonds, will let HUD keep the loans off its books.
In the first two auctions, held last year, HUD sold $306.8 million in loans. After Wednesday's sale, the department will be more than a third of the way toward its estimate of $1 billion loans sold by 1996.
The loans to be auctioned now and in subsequent sales were originated between the late 1960s and 1983 under Section 221 of the housing code to provide low-income multifamily housing units.
During those years, HUD added a provision to the code allowing lenders to turn back, or "put" the loans to HUD after 20 years, because the department was having difficulty encouraging lenders to offer loans with 40-year maturities.
But under the old law, in return for surrendering a Section 221 loan to HUD, a lender would receive debentures paying interest at a rate near the current rate on 10-year Treasuries, and in an amount equal to the unpaid principal and interest on the loan. As the 20th anniversary for many of the loans approached in 1990, HUD became concerned about the expense of taking back the loans.
That prompted Congress to pass the 1990 legislation permitting the auctions. Under the auction process, investors bid the interest rate they would accept to buy the loans at par. Once the auction is completed, the lender receives an amount equal to the unpaid balance plus interest that accrued during the auction process.
In addition, HUD makes monthly subsidy payments to the winning bidder to make up the difference between the loan rate and the rate bid by the investor.
HUD has listed the mortgages to be offered and provided other details about the next auction in Notice H93-69, a booklet titled Third Section 221(g)(4) Project Mortgage Auction.
