WASHINGTON Several state agencies recently began negotiating with the Department of Housing and Urban Development to buy some of the billions of dollars of multifamily loans that HUD is trying to get off its books, department officials said this week.

In a related development, HUD is targeting the second quarter of next year for its first auction of nonperforming loans to private investors. In that auction, the department plans to sell $1 billion of mortgages covering multifamily projects in the Southeast. according to officials from the Hamilton Securities Group Inc., HUD's financial adviser for the loan sales.

Overall, HUD is selling more than 2,000 mortgages in its portfolio, representing more than $7.0 billion, through a combination of auctions to investors and negotiated sales with state and local agencies, according to Hamilton officials. Most of the 2,400 loans are nonperforming and do not receive federal subsidies.

For the municipal market, loan purchases by state and local agencies would be significant because housing industry officials have predicted that the agencies would issue tax-exempt bonds to fund rehabilitation of the dilapidated properties financed by the loans.

So far, officials representing the Massachusetts, Illinois, and Pennsylvania housing finance agencies have been talking to HUD about sales of loans for projects in their areas, and several more states are expected to come forward as well, said John T. McEvoy, the executive director of the National Council of State Housing Agencies. McEvoy said it will probably be several months before any deals are consummated.

The agencies will be negotiating to buy loans that receive federal subsidies, only a small portion of the portfolio, said Helen Dunlap, HUD's deputy assistant secretary for multifamily housing programs.

The department believed it would be advantageous not to auction the subsidized loans because those mortgages generally represent projects that are in extremely poor condition and will require asset managers "with extensive experience working with very lowincome housing and a long-term commitment to the property;' Dunlap said in an interview.

"That obviously means state and local governments, as well as, potentially over time, other organizations based in community," Dunlap said.

In the first auction of nonperforming loans for private investors next spring, HUD expects to sell loans in small pools of between three and five mortgages. The loans will have an average unpaid principal balance of about $5, million each, according to C. Austin Fitts, a managing director for the Hamilton Group. Fitts was speaking last Friday to a meeting of the National Leased Housing Association.

The second auction of nonperforming loans is expected to take place in the third quarter of 1995, with HUD selling about $500 million of mortgages for projects in the Southwest, according to a preliminary schedule prepared by Hamilton. That will be followed by an auction in the fourth quarter of $1 billion of loans for projects in the Midwest.

HUD's Dunlap said the department is preparing a detailed information packet on the loans to be auctioned, and expects to release the packet in the next week to 10 days. Anyone seeking further information about the loan sales should contact Hamilton, Dunlap said.

The department has actually been holding auctions since 1992, but only for a very small group of performing loans under a special section of the housing law known as 221(g)(4). When those loans were first made in the 1970s and early 1980s, HUD said it would permit lenders to turn back, or "put," the mortgages to the department after 20 years. As many loans reached their 201h year in 1990, Congress passed legislation permitting HUD to auction the loans to avoid adding them to its burgeoning portfolio.

Department officials had wanted to expand beyond those auctions and begin clearing out other parts of its portfolio last year, but determined that federal housing law did not give them clear authority to do so. At HUD's urging, Congress passed legislation in March that restates the conditions under which the department can sell subsidized loans and clarifies its authority to sell unsubsidized loans.

Originally, HUD planned to sell the loans only in pools to Wall Street investors. But last year, state and local housing officials prevailed on HUD to give them a crack at purchasing individual loans, So that the housing officials could refurbish deteriorated apartments built with the loans, and preserve them for low-income tenants.

So far, no local agencies have come forward to negotiate sales with HUD, although the department has said it is willing to talk to them, said John C. Murphy, the executive director of the Association of Local Housing Finance Agencies.

Dunlap said the department will negotiate with any state or local agency or other public entity that has "demonstrated asset-management capacity. This isn't just the sale of mortgages; this is the sale of a long-term responsibility, which means that the capacity has to be there."

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