WASHINGTON -- Three bond issues backed by Mutual Benefit Life Insurance Co. -- including the largest issue insured by that firm -- could default next month unless they are refunded or another source of money is found to redeem the bonds.

The three 1985 housing issues -- which were sold by Maryland state and county issuers to finance apartments -- are among 59 bond deals totaling $809 million that were guaranteed by Mutual Benefit and then thrown into jeopardy after the insurer was seized by New Jersey regulators a few months ago.

Of the 59 issues, two already have experienced "events of default," according to the bond indentures, one on Sept. 1 and one on Oct. 1. But investors are not necessarily going to lose their money. Negotiations between Mutual Benefit, bondholders, and trustees to keep the issues outstanding are underway.

One of the three issues facing possible default is the largest of the 59 deals. That is the Montgomery County, Md., Housing Opportunities Commission's $53.22 million Chase Grove issue, which was used to finance the 784-unit Oakwood apartments (formerly called Chase Grove) in Gaithersburg, Md. The issue contains two sets of term bonds with interest rates that are fixed to remarketing dates of Dec. 1, 1991, or Dec. 1, 1997.

The other two issues, which were sold by the Maryland Community Development Administration, are a $26.815 million issue financing the 432-unit Chase Ridge apartments in Silver Spring, Md., and a $16.835 million issue that financed the 269-unit Chase Lea apartments in Owings Mills, Md. Those bonds are fixed rate with a series of puts, the first of which is Nov. 1.

The apartment projects financed by the bonds are all operating with more than 90% occupancy, according to property management officials.

But Crestar Bank in Richmond, the trustee for the county commission's Chase Grove issue, warned bondholders last week that the bonds could default on Nov. 6 when they become subject to mandatory redemption.

"You should ... be aware that there is a risk that the trustee will have no monies on the redemption date with which to redeem the bonds. In that case, there will be an 'Even of Default' under the Indenture of Trust pursuant to which the bonds were issued," Crester Bank said in a report mailed out to bondholders on Thursday.

Security Trust Co. in Baltimore, the trustee for the Chase Ridge and Chase Lea issues, was expected to warn bondholders of the possible defaults of those issues in reports to have been mailed on Friday, although bank officials would not comment on the contents of those letters. The mandatory redemption date for those bonds, which is driven by the first put, is Nov. 1.

The bond issues are being redeemed because the owners of the apartment projects failed to find alternative credit support for the issues after the guarantor, Mutual Benefit, was seized.

Crestar Bank told bondholders that the owner of the Chase Grove project had failed to find another credit provider by Oct. 7, triggering the need for mandatory redemption, which the bank scheduled for Nov. 6. The project's owner is the South Bay Club Apartments -- Van Nuys, a California general partnership that is affiliated with R & B Realty in Los Angeles. Mutual Benefit, through its subsidiary Muben Realty Co., had been a part owner of Chase Grove until last year when the apartments were sold to the California partnership.

A redemption of the bonds would result in default unless the bondholders could be paid in full -- either with the proceeds from refunding bonds or funds from the project owner, Mutual Benefit, or some other source.

Crestar told the Chase Grove bondholders it had received no assurances that the project owner would be able to prepay the loan, and it even might not be able to demand payment from Mutual Benefit, which is currently in rehabilitation proceedings. The bank noted in its report that the project owner was trying to arrange for a refunding of the bonds through the Montgomery County Housing Opportunities Commission but said it had not made any "independent investigation," that a refunding would occur or that refunding proceeds would be sufficient to redeem the bonds.

Both the county commission and the Maryland Community Development Administration announced last week that they were trying to refund the Mutual Benefit-packed issues. If they were current refunded, the proceeds of the refunding bonds would be used to redeem the 1985 bonds and some other source of funds, such as apartment project revenues, would be used to pay debt service on the refunding bonds.

But several sources connected with the bond issues questioned whether refundings could be arranged in time or at all. One major problem with refunding the Chase Ridge and Chase Lea issues is that Mutual Benefit, through Muben Realty Co., is still part owner of the apartment projects along with Dallas-based Trammell Crow Residential Properties.

"Who would want to guarantee those issues if they didn't have 100% of the projects as collateral?" said one source who did not want to be identified.

The Montgomery county commission said an AAA-rated credit-enhancer had agreed to provide credit enhancement for a refunding of the Chase Grove bonds, but the refunding would proceed only if certain conditions set forth by that institution and the commission were met.

Officials close to the negotiations on the two Mutual Benefit-backed bond issues already in default said one course of action after default is to foreclose on the projects and disburse the salvaged proceeds to bondholders. Those actions are not being taken currently in order to give Mutual Benefit and the other parties time to work out an agreement. The Maryland deals, observers said, are also not likely to foreclose.

Mutual Benefit continues to make interest payments on the two defaulted bond issues, as it has made interest payments to life insurance policies and annuities. The events of default are necessary because the failed insurer has not, and will not, make principal payments on any securities until it is out of conservatorship, according to the New Jersey Department of Insurance

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