Mutual Benefit Life Insurance Co. has said it will let a New Jersey court lift a restraining order barring trustees from foreclosing on bond projects, if certain conditions are met.

The chief condition is that bond trustees and project developers agree to "release Mutual Benefit from any liability under its guarantee," according to an Aug. 26 memo by lawyers representing investors of some bonds backed by the insurer.

The memo, which was sent to members of a trustee/bondholder committee, describes an August meeting in which Mutual Benefit officials clarified how bondholders would be treated under the company's proposed rehabilitation plan. The committee is made up of trustees and holders of tax-exempt bonds for 17 housing projects backed by the insurer.

Investors in at least 10 bond issues backed by the company feel that lifting the restraining order may allow them to recoup some of the losses they have suffered since the failed Newark, N.J.-based insurer was seized by state insurance regulators in July 1991.

Shortly after Mutual Benefit was taken over, the insurer enacted a moratorium on the redemption of municipal bonds it guarantees. In addition, a standstill agreement reached between Mutual Benefit and the trustees and holders of 17 bond issues forbade them from foreclosing on those projects.

Then, in December 1991, Judge Paul Levy of the chancery division of the superior court in Mercer County, who is overseeing rehabilitation of the failed insurer, issued the restraining order. Mutual Benefit had sought the order to stave off foreclosures against defaulted housing projects and absolve the company from making up interest shortfalls on the bonds.

Under the terms of Mutual Benefit's rehabilitation plan filed with the New Jersey courts on Aug. 3, bondholders are now labeled as unsecured creditors and thereby not expected to receive any money from the company. The plan, which requires court approval, is unlikely to be implemented before the beginning of next year.

Removal of the restraining order would affect about 10 of the approximately 62 bond issues secured by the insurer. The memo does not set a time frame for when the order might be lifted.

The 10 projects financed by those bonds are guaranteed but not owned by Mutual Benefit. Although company officials declined to give specifics, Mutual Benefit may own portions of the remaining 52 housing projects, bondholders suggest.

The financially strapped insurer had originally sought the restraining order with the argument that a rush of foreclosures would leave it grappling with bondholder claims to cover any interest shortfalls on the projects it backs.

While agreement to conditions described in the memo could return to bondholders the ability to force foreclosures on projects that defaulted on interest payments, bondholders could only look to liquidation of projects and to the developer for payment.

Penelope M. Taylor, a lawyer with McCarter & English in Newark, N.J., who helped write the memo, declined to comment. Officials from Mutual Benefit could not be reached.

Approximately six of the 17 bond issues represented by the committee are not owned by the company, several bondholders said.

If Mutual Benefit receives court approval for its rehabilitation plan, it plans to restructure the remaining projects based on the fair market value of each project as of July 16, 1991.

Any restructuring is expected to reduce the interest rate and principal amount of the bonds because the total value would be based on each project's estimated value as of July 16,1991. The value of restructured projects is expected to be less than that of the original projects since sizable declines in the worth of Mutual Benefit's real estate portfolio in 1991 led to a downgrade of its claims-paying ability credit rating. This action eventually caused the company to be taken over by New Jersey insurance officials.

The memo is unclear about whether Mutual Benefit would provide security for the restructured bonds or make payments on them if the developer were unable to, according to several bondholders who received copies of the memo.

Currently, any guarantee by Mutual Benefit would be considered worthless because municipal bondholders would not receive any payments from the company under the rehabilitation plan, bondholders said.

"I don't know, and who cares, whether they give you their guarantee," one bondholder said. "It isn't worth a dime."

"What [the restructuring plan] is designed to do is turn all these projects over to Mutual Benefit, allowing them to restructure the deals, mark the equity down, and keep the building," another bondholder complained. "It's wrong."

"We as bondholders gave [Mutual Benefit] an easy time thinking we were going to be looked after, but we've been left to the dogs," the bondholder said. "Despite the fact that it's reneged on all of its promises, Mutual Benefit wants to call all of the shots. I think Mutual Benefit is deliberately trying to get out from under the obligations and still hold onto the property."

But if the restraining order is lifted, the source and several others said, "the bondholders would at least be in a position where they could claim their assets."

Separately, trustees for three other Mutual Benefit-backed projects are seeking to have the New Jersey Supreme Court overturn the restraining order under what is known as a leave to appeal.

One bondholder speculated that Mutual Benefit may be seeking a release from its guarantee in order to avoid costly court battles in the future.

"They may know that they cannot defend their position in court," the bondholder said. "No court in the world is going to make you keep paying for that." He explained that Mutual Benefit may have a hard time justifying how it continues to collect fees for a guarantee it will not honor.

Mutual Benefit was placed into rehabilitation because problems with its real estate portfolio led to a surge of withdrawals and policy surrenders.

Mutual Benefit-backed bonds were issued by state and local governments largely to finance real estate developments, many of which are government-assisted housing projects.

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