WASHINGTON - Next month, the Resolution Trust Corp. will begin selling nearly $2 billion of non-performing housing loans backed by tax-exempt bonds under a procedure that some housing industry officials say could endanger the creditworthiness of the bonds.

In the first of a series of offerings. the RTC will accept bids on $287 million of loans through Oct. 14. The loans were made and the bonds insured by failed savings and loans taken over by the corporation, which has assumed the role of credit enhancer for the bonds.

The RTC plans to sell the bonds along with the loans, but in doing so it wants to stop insuring the bonds. If that happens, the housing officials warn, the bonds would become unrated, and would technically be in default.

"We really fear that what's at stake here is both the reputation of the agencies that issued bonds to finance these projects and the potential loss of affordable housing stock," said John C. Murphy. executive director of the Association of Local Housing Finance Agencies.

John T. McEvoy, executive director of the National Council of State Housing Agencies, said, "Having junk in the market is not very attractive."

He added, "This is the kind of a situation where the RTC should be sitting down with the issuers involved and explaining their strategy and trying to make sure there isn't a better way to do it."

But RTC spokeswoman Diane Zyats pointed out that the corporation is making sure to sell the bonds with the full cooperation of bond trustees and issuing authorities. "In eliminating the credit enhancement, we [are receiving] permission from the public issuers." she said.

An RTC memo to prospective bidders dated Sept. 2 states that the corporation has reached agreements with issuers on about half of the $287 million up for sale next month. "The RTC is currently in various stages of negotiation with the bond issuers and trustees on the remaining assets," the memo says.

The corporation estimates that the failed savings and loans it has acquired hold more than $3 billion in housing loans financed with tax-exempt multifamily housing bonds, of which $1.8 billion are nonperforming loans.

The bonds, issued mainly by local authorities, carry investment-grade ratings because they received a letter of credit or some other form of insurance from thrifts that had made the loans for the housing projects. Now that those thrifts have failed, the corporation has become the credit enhancer of the bonds.

In a June 12 directive to RTC field offices, the corporation stated that it wants to begin disposing of the loans and bonds. it outlined two sets of procedures: one for performing loans, and the other for nonperforming loans.

The housing officials said they have no quarrel with the corporation's plans for performing loans, which call for placing them with a commercial loan servicer. The RTC would continue in its role as insurer of the bonds, until expiration of the original credit enhancement agreement entered into by the thrift and the issuer.

The problem lies with the procedure for nonperforming loans, the officials said. They explained that because the loans are not current, the corporation in its role of insurer is having to make debt service payments to bondholders. And, they said, the RTC has proposed that in selling the loans, it also relinquish its role as credit enhancer and sell the bonds as unrated debt.

"The RTC will attempt to [sell] bonds by amending the existing indentures to provide for purchase in lieu of redemption or acceleration, eliminating the credit enhancement, and offering the assets for sale along with the related, unenhanced bonds," the corporation stated in the June 12 directive.

In various documents, the corporation has said it wants to sell the bonds to help issuers by keeping the issues from being redeemed when the loan sales take place. When the original developers received their bond-financed loans, they had to agree to rent a certain number of units to low-income people. If the bonds are redeemed, the low-income restrictions on the units also end.

"We are strong believers in and advocates of affordable housing," Ms. Zyats said.

But Mr. Murphy said he is concerned that stripping the bonds of their credit enhancement will put them into default. "This is because the loan is nonperforming, and there will no longer be credit enhancement between it and the bondholders," he stated in a July 22 letter to the corporation. "The issuer must disclose this default as it attempts future borrowings in the market."

Mr. Murphy also told the corporation he is concerned that such defaults "may result in litigation and other costs involving the issuer" because many have strict policies against unrated bonds. "RTC's policy does not address any of these concerns," he said.

The corporation needs to find an alternative method for disposing of bonds that back nonperforming loans, Mr. Murphy said. He added that he has written letters to the RTC and called the corporation about the matter, but has received no response from officials there.

Ms. Zyats said the corporation realizes the bonds will become unrated once they lose their insurance, and the RTC is trying to determine the proper way to market the bonds.

"We expect to discuss this with the appropriate public entities, and we're evaluating what we will do." she said.

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