B-122429, JULY 14, 1955, 35 COMP. GEN. 18

B-122429, JULY 14, 1955, 35 COMP. GEN. 18

MARITIME ADMINISTRATION - SHIP MORTGAGE INSURANCE THE PURCHASER OF A VESSEL FROM THE GOVERNMENT WHO EXECUTES A PREFERRED SHIP MORTGAGE TO THE UNITED STATES AND A SECOND MORTGAGE TO A PRIVATE LENDING INSTITUTION FOR THE PAYMENT OF A RECONSTRUCTION AND RECONDITIONING LOAN MAY HAVE THE SECOND LIEN MORTGAGE INSURED BY THE GOVERNMENT UNDER TITLE XI OF THE MERCHANT MARINE ACT OF 1936.

TO THE ADMINISTRATOR, MARITIME ADMINISTRATION, JULY 14, 1955:

REFERENCE IS MADE TO YOUR LETTER OF MAY 10, 1955, REQUESTING CLARIFICATION OF OUR DECISION DATED FEBRUARY 23, 1955, 34 COMP. GEN. 392, SO FAR AS THERE IS CONCERNED THE QUESTION AS TO WHETHER SECOND LIEN SHIP MORTGAGES ARE INSURABLE UNDER TITLE XI OF THE MERCHANT MARINE ACT, 1936, AS AMENDED.

RELATIVE TO ONE OF THE TWO BASIC QUESTIONS PRESENTED IN A LETTER DATED DECEMBER 21, 1954, FROM YOUR ADMINISTRATION, WE CONCLUDED THAT EXCEPTION (1) TO SECTION 1106 OF TITLE XI CLEARLY PERMITS INSURANCE OF A NEW MORTGAGE TO THE EXTENT OF 90 PERCENT OF THE BALANCE DUE UNDER A PURCHASE MONEY MORTGAGE GIVEN TO THE UNITED STATES IN CONNECTION WITH THE SALE UNDER TITLE VII OF A COMPARATIVELY NEW MARINER, PLUS 90 PERCENT OF 75 PERCENT OF THE COST OF RECONSTRUCTING THE VESSEL TO MAKE IT MORE SUITABLE FOR COMMERCIAL USE. HOWEVER, IN VIEW OF THE LIMITATION OF $20,000,000 ON THE TOTAL OF ALL OUTSTANDING MORTGAGES INSURABLE UNDER EXCEPTION (1), AND A PREFERENCE EXPRESSED BY REPRESENTATIVES OF THE OCEANIC STEAMSHIP COMPANY FOR INSURANCE OF A SECOND-LIEN MORTGAGE, WE CONSIDERED TO A LIMITED DEGREE THE ALTERNATIVE SUGGESTION OF YOUR ADMINISTRATION THAT SECOND-LIEN MORTGAGES MIGHT BE INSURED WHEN THE MORTGAGE COVERING THE FIRST LIEN IS HELD BY THE GOVERNMENT OR WHERE BOTH MORTGAGES ARE HELD BY THE SAME FINANCIAL INSTITUTION. IN THAT CONNECTION, ATTENTION WAS INVITED TO EXCEPTION (2) TO SECTION 1106, 46 U.S.C. 1276, WHICH PROVIDES:

WHERE THE SECRETARY OF COMMERCE HAS INSURED A MORTGAGE UNDER THE PROVISIONS OF THIS TITLE, AND THE MORTGAGOR THEREAFTER MAKES APPLICATION TO THE MORTGAGEE OR ANOTHER LENDER FOR AN ADDITIONAL LOAN OR ADVANCE FOR RECONDITIONING OR RECONSTRUCTING THE MORTGAGED PROPERTY, THE SECRETARY OF COMMERCE MAY INSURE A NEW MORTGAGE, NOT TO EXTEND BEYOND THE MATURITY DATE OF THE ORIGINAL MORTGAGE, IN THE AMOUNT OF THE PRINCIPAL OUTSTANDING BALANCE OF THE ORIGINAL MORTGAGE PLUS THE AMOUNT OF THE ADDITIONAL LOAN, PROVIDED THE AMOUNT OF THE ADDITIONAL LOAN IS WITHIN THE LIMITS OF PARAGRAPH (2) OF SUBSECTION (A) OF SECTION 1104 (46 U.S.C. 1274) AND THE NEW MORTGAGE CONFORMS TO THE ELIGIBILITY REQUIREMENTS OF ALL THE OTHER PARAGRAPHS OF SAID SUBSECTION (A);

OBVIOUSLY, WHEN AN ORIGINAL MORTGAGE HAS BEEN INSURED BY THE GOVERNMENT, THE REQUIREMENTS OF EXCEPTION (2) TO SECTION 1106 COULD BE SUBSTANTIALLY COMPLIED WITH THROUGH THE PROCESS OF PERMITTING THE ORIGINAL MORTGAGE TO CONTINUE AND INSURING A NEW MORTGAGE HELD AS SECURITY FOR A LOAN OBTAINED FROM THE ORIGINAL MORTGAGEE OR ANOTHER LENDER FOR RECONDITIONING OR RECONSTRUCTING THE MORTGAGED PROPERTY. ALSO, AS IMPLIED IN OUR DECISION, A MORTGAGE HELD BY THE GOVERNMENT COULD REASONABLY BE CONSIDERED WITHIN THE SAME CATEGORY AS AN INSURED MORTGAGE HELD BY A PRIVATE LENDING INSTITUTION, THEREBY MAKING IT POSSIBLE FOR THE PURCHASER OF A VESSEL FROM THE UNITED STATES TO NEGOTIATE A LOAN FOR RECONSTRUCTION PURPOSES ON THE BASIS THAT A SECOND LIEN MORTGAGE WOULD BE INSURED BY THE GOVERNMENT TO THE EXTENT ALLOWABLE UNDER SUBSECTION (A), SECTION 1104, OF TITLE XI, 46 U.S.C. 1274.

YOU STATE THAT COUNSEL FOR ONE OF THE LENDING INSTITUTIONS HAS RAISED THE QUESTION WHETHER A SECOND-LIEN MORTGAGE IS ELIGIBLE FOR INSURANCE UNDER TITLE XI, AND PARTICULARLY SUBSECTION 1104 (A), 46 U.S.C. 1274 (A). COURSE, AS CONTENDED BY COUNSEL FOR THE LENDING INSTITUTION, SECTION 1106 (2) CONTEMPLATES A REFUNDING BY A NEW MORTGAGE AND THERE APPEARS TO BE A DIFFERENCE BETWEEN THE ELIGIBILITY REQUIREMENTS OF PARAGRAPH 7 AND THOSE OF PARAGRAPH 10 OF SUBSECTION 1104 (A). ADDITIONAL AND SECONDARY LIENS ARE MENTIONED IN THE FORMER PARAGRAPH WITHOUT COMMENT AS TO THEIR INSURABILITY, WHILE PARAGRAPH 10, WHICH HAS REFERENCE TO "SOLE-RECOURSE" MORTGAGES ON PASSENGER VESSELS HAVING THE TONNAGE, SPEED, PASSENGER ACCOMMODATIONS AND OTHER CHARACTERISTICS SET FORTH IN TITLE V, CONTAINS A PROVISO THAT THE VESSEL UPON SURRENDER SHALL BE "FREE AND CLEAR OF ALL LIENS AND ENCUMBRANCES WHATSOEVER EXCEPT THE LIEN OF THE PREFERRED MORTGAGE.' AS FURTHER CONTENDED BY SUCH COUNSEL, INSURANCE OF SECOND-LIEN MORTGAGES MIGHT RESULT IN CERTAIN PRACTICAL DIFFICULTIES IN THE ENFORCEMENT OF THE DEFAULT PROVISIONS OF SECTION 1105 (C) (1) OF TITLE XI, 46 U.S.C. 1275.

HOWEVER, PARAGRAPH 10 OF SUBSECTION 1104 (A) CONTAINS AN ADDITIONAL PROVISO THAT "ANY DEFICIENCIES WITH RESPECT TO FREEDOM FROM ENCUMBRANCES, CONDITION AND CLASS MAY, TO THE EXTENT COVERED BY VALID POLICIES OF INSURANCE, BE SATISFIED BY THE ASSIGNMENT TO THE UNITED STATES OF CLAIMS OF THE MORTGAGOR UNDER SUCH POLICIES.' FURTHER, IN SUBSECTION 1101 (A) OF TITLE XI, 46 U.S. CODE 1271, THE TERM "MORTGAGE" IS STATED AS INCLUDING "A PREFERRED MORTGAGE AS DEFINED IN THE SHIP MORTGAGE ACT, 1920, AS AMENDED," AND, AS INDICATED IN THE LETTER DATED DECEMBER 21, 1954, THERE IS NOTHING IN THE SHIP MORTGAGE ACT, 1920, 41 STAT. 1000, LIMITING PREFERRED MORTGAGES TO THOSE WHICH CREATE A FIRST LIEN ON THE VESSEL. THUS, IT IS APPARENT THAT THE CONGRESS DID NOT INTEND TO PROHIBIT INSURANCE OF SECOND- LIEN MORTGAGES IF MADE PURSUANT TO REASONABLE REGULATIONS CONSISTENT WITH ALL OF THE VARIOUS PROVISIONS OF TITLE XI.

SPECIFICALLY, IN THE CASE OF A SALE OF A GOVERNMENT-OWNED VESSEL, THE INSURANCE OF AN APPROVED SECONDARY LIEN CERTAINLY WOULD NOT BE OBJECTIONABLE IF MADE FOR RECONSTRUCTION PURPOSES SINCE THERE WOULD NOT BE INVOLVED ANY UNUSUAL DIFFICULTIES IN THE ADMINISTRATION OF THE DEFAULT PROVISIONS OF SECTION 1105 OF TITLE XI. ..END :