Municipal bondholders have complained about early redemption of their Federal Housing Administration-backed investments, but they, like the rest of the economy, are simply victims of the national real estate depression, according to real estate and federal agency sources.

And well-protected victims at that.

At least 10 deals have gone through mortgage defaults and subsequent extraordinary calls, the largest of which was the $159 million loan default at Presidential Towers in Chicago in early 1990. In each case, investors have received their principal back, thanks to the FHA insurance, but lost whatever premium they might have paid for the mouth-watering coupons.

Most real estate professionals, on the other hand, had not protection.

"I wish someone gave me an insurance policy so I could get my money back," said one developer who lost about $10 million building on an FHA-backed project.

In fact, the statistical risk that a federally backed tax-exempt deal will experience an extraordinary call is very low. Of the $20.45 billion of new municipal issues backed by FHA insurance policies in the past 11 years, only $730 million, or 3.6%,have defaulted in one way or another, according to data from Securities Data Co. and Bond Investors Association.

Yet bondholders remain irked, both by trading losses and by the fact that project developers stand to save millions through defaulting on FHA-backed deals sold in the high-interest mid-1980s. The savings, paid for out of federal taxes sitting in the FHA's general insurance fund, have prompted investors to accuse the developers of triggering "structured" defaults.

But are they? The most suspect example would be the healthy project that stops making mortgage payments without reason. Normandie Court I on Manhattan's Upper East Side has all the outward appearances of being such a structured default. When MF Associates, a subsidiary of the Milstein family, which owns the multifamily development, defaulted in June 1990, the project had 97% occupancy, and many of the units were fetching luxurious rents of $2,000 a month.

Investors, whose new York State Housing Agency 1984 Series A bonds plunged from 113 cents on the dollar to below par, pointed at the occupancy and blustered about possible lawsuits and fraud. Officials at the U.S. Department of Housing and Urban Development, which embraces FHA, meanwhile went sbout their examination of the project. They found a solid public-private partnership that ended up on the wrong side of the recession.

Not Enough Revenues

"The examination determined that in fact there would be a default in the property" regardless of who was managing it, said Ronald Rosenfeld, general special assistant secretary for housing with HUD's federal housing commission and overseer of the Normandie Court workout. "The revenues did not cover the expenses."

James Yasser, senior vice president at Milstein Properties, explained that Normandie Court I's viability was a matter of total revenues, not simply occupancy rates, and rental rates collected since the project opened in 1986 have steadily eroded. Furthermore, real estate taxex have increased in the meantime, he said.

"The problem in New York is that rent levels have actually declined," Mr. Yasser said. "Our gross revenues were not keeping pace with the tax rates and the cost of turnover. Nowadays, if your revenue stream isn't growing, you're dead."

Still, bondholders bristle over what they deem is a process that takes money out of their portfolios and ends up lowering developers' debt service. Some accuse the Milstein Properties of hiding funds by plowing revenues back into luxury complex's appointments.

An Normandie Court, the process has resulted in substantial savings. The subsequent refinancing is saving Milstein Properties about $4 million a year, Mr. Yasser said. But there is not one piece of evidence to suggest that the developers engaged in a technically masterful interest-rate play that bilks both federal taxpayers and municipal bondholders.

Mr. Rosenfeld of HUD said there was nothing suspicious about the loan default. "I am not aware of any such thing," he said. "Had that occurred, or had there even been any suspicion [of hidden revenues], we would have approached this differently. We don't permit that.

"My feeling is that [the Milsteins'] actions in this refunding matter have been responsible," he added.

The situation would have been far different if Normandie Court was granted direct subsidies for the 20% of the project occupied by low-to moderate-income residents. One of FHA's Section 8 programs allowed developers to receive monthly reimbursements that bring the 20% units up to market rate for the developer, but by 1984, when the deal was originally committed, President Reagan's federal weight-loss program was well advanced and housing programs were considered fat.

As a result, MF Associates structured a project where the market-rate units subsidized the low-income units. The rental market has hit the skids so m uch since the original projections, Mr. Yasser said, that "Paul Milstein basically looks at this development as charity."

Perhaps the only project that can be accused of not providing the social benefits normally associated with an FHA-backed borrwing is Presidential Towers in Chicago. This mortgage default, the largest to date at $159 million, has pushed HUD to the brnik of foreclosure. One of the considerations tempting HUD to seize the project, according to a HUD source, is that lobbyists for Presidential Towers had obtained a waiver of the requirement to set aside apartments for low-income residents.

The original 1983 financing for Presidential Towers was made possible through political wrangling by Rep. Daniel Rostenkowski, D-Ill., and Rep. Frank Annunzio, D-Ill., according to The Chicago Tribune.

The other FHA defaults that resulted in early calls of tax-exempt issues had low occupancy rates and strong claims to the difficulty of building 80/20 projects in marginal neighborhoods, and Presidential Towers is in a rough area. While Normandie Court at least sits within blocks of very desirable areas, FHA-backed projects in Massachusetts, Connecticut, and New Jersey were not as well situated.

The most drastic situation is perhaps Hunters Glen in Camden, N.J. A rehabilitation project assisted with tax-exempts, FHA mortgage insurance, and Government National Mortgage Association Backing, the ambitious developers were nonetheless incapable of fighting off assiduous drug dealers in the area. Market-rate tenants eventually fled, and the project defaulted in January 1989.

A Parallel to Normandie

Another FHA-mortgage default in the New York City area presents a parallel to Normandie Court's problems, but better reflects the vagaries of the real estate recession and the difficulty of projecting rental levels. The $150 million Presidential Plaza at Newport multifamily complex in Newport, N.J. -- owned and operated by a limited partnership including the LeFrak and Simon families -- defaulted on its FHA-backed mortgage in November 1990.

In Newport, however, occupancy levels had fallen to 80%, primarily because of the devastated Wall Street employment market. The project, on the banks of the Hudson River, is in plain sight of Wall Street's glass towers. It was built with the goal of luring investment bankers and other financial service professionals from Manhattan, according to a spokesman for the partnership, NC Housing Associates.

"Newport specifically feeds off of Lower Manhattan," the spokesman said. "When you have massive layoffs on Wall Street -- Drexel Burnham Lambert collapses, banks and insurance companies are undre the gun -- the project has to suffer from that."

Before the market collapsed and about 50,000 people were laid off, the spokesman added, the project appeared fine. "The rents that were originally feasible -- and certainly in line with the market when the project was put together -- could not be obtained," he said. Newport City, like Normandie Court, does not receive monthly federal subsidies for the 20% lower-income units.

Tbhat projects built in the mid-1980s were unhappy victims of a very bad real estate market is evident from similar 80%/20% projects built only a few years earlier, one major New York developer pointed out. Battery Park City, financed in the early 1980s, has carried mortgages ranging up to 13% without defaulting, said the developer, who asked not to be identified. The difference, he said, is that Battery Park was "rented up" and stabilized well before the real estate depression set in.

Bondholders counter that the federal government, particularly through the HUD examiners, is guilty of complicity in allowing parties to default and then keep their projects. They argue that it is politically more attractive not to add more properties to the already burgeoning federal portfolio -- swelled by the savings and loan debacle -- so HUD turns a blind eye and extends another loan to the defaulting party. None of the investors contacted would speak on the record.

Things certainly were in rough shape at HUD when these deals were approved. Under the direction of Secretary Samuel Pierce, the working conditions were "abysmal," according to one veteran staffer. Mr. Pierce alinated almost every employee through his aloofness -- he wouold insist that none of the rank and file ride the elevator with him -- and some of the best talent left the agency.

Yet examination of records from hearings by the U.S. Senate's Committee on Banking, Housnig, and Urban Affairs into reported Abuses uncovered problems with those projects that qualified for the direct rent subsidies -- not those that subsidized low-income units with market-rate rents, such as Normandie Court and Newport City.

More Profits Than Predicted

John M. Ols, director of housing and community development at the General Accounting Office, testified that the majority of Section 8 subsidized projects examined were more profitable than expected. The hearings were held from January through May 1990.

"We believe that the Sierra Pointe developer, as well as most developers of the other projects we reviewed, realized cash flows that were greater than what would have been required to ensure project feasibility," Mr. Ols said. "The developers realized sizable cash flows while assuming less risk than is usually encountered in tyical development activities."

The GAO examination also found instances where the subsidized rents cost the federal government more than the market rate rents in the same area. Clark County, Nev., was cited as such an example in the study.

The Senate investigations also uncovered staffing problems at HUD and FHA that directly affected the quality of work done. George O. Hipps, vice president of P.W. Funding Mortgage Co., said FHA mortgage insurance programs are "absolutely essential" for the government's multifamily housing policies, but that staff shortages put the programs in "serious jeopardy."

"It has been suggested many times that HUD, and particularly [FHA], has suffered from a 'brain drain,'" Mr. Hipps said. "Clearly, that assessment is accurate."

Yet the flight of experienced administrators triggered in the mid-1980s has been stemmed and reversed by the efforts of Secretary Jack Kemp, according to current HUD employees. And the fact that the refinancings took 12 to 16 months is a sign, they said, that examiners are painstakingly picking through the documents of loan defaults to make sure a paydown is warranted.

Last year, bondholders complained that the FHA guarantee was more a warning sign than an invitation to invest because of the quick series of defaults. But institutional investors, the first and louest to cry foul, are well aware of the early paydown risk and extraordinary call provisions in the offering statements.

Moreover, both Standard & Poor's Corp. and Moody's Investors Service refuse to incorporate the risk of early call on housing bonds -- even federally backed issues -- into their credit quality rating.

Analysts at both agencies recently stuck by their guns. Despite the loss of premiums in the mortgage default scenarios, one analyst said, "You get your money back."

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