A real estate developer has to find new insurance for the mortgage backing $10.7 million of Connecticut Housing Finance Authority bonds, following New Jersey's takeover of Mutual Benefit Life Insurance Co.

The bonds were issued in 1985 to finance a 166-unit multifamily residential complex in Middletown, Conn. Mutual Benefit had guaranteed the loan of the proceeds to the project's developer, Trammell Crow Co.

An official at Connecticut National Bank, which is serving as trustee for the bonds, said that if Trammel Crow fails to find alternate insurance for its mortgage within 90 days, the deal would go into technical default.

Investors can put their 8% bonds Oct. 1, said the official, who requested he not be identified.

Remarketing the bonds now, though, would prove problematic. Dillon, Read & Co. resigned its position as remarketing agent on the deal following the July 16 takeover of Mutual Benefit.

Dillon was acting on a legal clause that allowed the remarketing agent to back out in the event of problems with the mortgage insurance. A public finance official at Dillon would not comment.

But the source at the trustee bank conceded bondholders are worried.

"Everybody's anxious to find out what they're going to do," the bank official said. He added that the bank maintains no cash reserves for the project and that the money to honor investors' puts must come from the developer.

Officials at Trammell Crow could not be reached for comment.

Gov. Lowell P. Weicker Jr. gave new life to a proposed bond-financed housing and retail complex in downtown New Haven last month by calling publicly for its rehabilitation.

In 1989, the Connecticut Housing Finance Authority sold $48 million worth of bonds for the project, with Yale University agreeing to purchase $10 million as taxable bonds and the rest being sold tax free. Standard & Poor's Corp. rates the bonds AA-plus, based on the state's guarantee and the reputation of the issuing authority.

The development, called the Ninth Square project, was abandoned by the board in March because of fears that it would not conform to state housing policy.

Authority board members voted unanimously to kill the project, said Chris Cooper, a spokesman for the Connecticut Department of Housing. "They didn't feel that it was the right kind of housing mix," Mr. Cooper said. He added there were questions as to "whether or not those dollars could be better spent by emphasizing something like scattered housing," rather than the dense-pack approach of the Ninth Square project.

But Mayor John C. Daniels of New Haven and President Benno Schmidt of Yale University devised a new plan that state officials found more acceptable, according to Henry S. Scherer, housing finance authority board chairman.

The new plan includes changing the proposed rental rates for 12 of the proposed 333 housing units to market-rate from subsidized rates.

In addition, insurance on the project would begin "after substantial completion of construction" on the project, as defined by the housing finance authority. Originally, insurance on the developer's mortgage had been scheduled to take effect after 70% of the housing was occupied.

Another important change was the agreement by Yale to make half of a $4.5 million loan for the project's initial phase that the authority was originally going to bear by itself.

Mr. Scherer, who is also commissioner of the Connecticut Department of Housing, said the governor's endorsement of the project -- or, at least, his taking another look at it -- does not mean the board will necessarily vote in favor of Ninth Square at their next meeting on Aug. 29.

At the meeting, board members will consider, among other things, a study on Ninth Square's feasibility by the New York-based financial advisory firm Commonwealth Capital Partners.

If the project, whose total price tag is about $95 million, does not go forward, unexpended proceeds of the bond issue will be used to redeem outstanding bonds, a Standard & Poor's official said.

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