B-151860, JULY 30, 1963, 43 COMP. GEN. 98

B-151860, JULY 30, 1963, 43 COMP. GEN. 98

MARITIME MATTERS - MORTGAGE INSURANCE - REFINANCING PROHIBITION A PROPOSAL TO MODIFY A VESSEL MORTGAGE THAT WAS INSURED UNDER TITLE X OF THE MERCHANT MARINE ACT, 1936, 46 U.S.C. 1271, ET SEQ., CONTAINING A PROHIBITION AGAINST REFINANCING EXISTING MORTGAGES, TO PERMIT REDUCED PAYMENTS OVER A LONGER PERIOD OF TIME WHICH PROPOSAL WILL NOT INVOLVE A NEW MORTGAGE BUT WILL IMPROVE THE FINANCIAL POSITION OF THE GOVERNMENT IS NOT A REFINANCING TRANSACTION WITHIN THE PROHIBITION BUT IS MERELY THE RESCHEDULING OF PAYMENTS UNDER THE ORIGINAL MORTGAGE AND, THEREFORE, UNDER THE AUTHORITY IN SECTION 207 OF THE ACT, 46 U.S.C. 1117, REQUIRING THE MARITIME ADMINISTRATOR TO TAKE NECESSARY STEPS TO PROTECT THE COLLATERAL FOR MORTGAGE DEBTS, THE PROPOSAL IS PROPERLY FOR ADOPTION.

TO THE ADMINISTRATOR, MARITIME ADMINISTRATION, JULY 30, 1963:

REFERENCE IS MADE TO YOUR LETTER OF JUNE 21, 1963, REQUESTING TO BE ADVISED WHETHER WE CONCUR IN THE VIEW OF YOUR ADMINISTRATION THAT YOU HAVE LEGAL AUTHORITY UNDER TITLE XI OF THE MERCHANT MARINE ACT, 1936, 46 U.S.C. 1271, ET SEQ., AS AMENDED, TO CONTINUE TO INSURE AN EXISTING MORTGAGE ON THE S.S. MATSONIA IN THE EVENT SUCH MORTGAGE IS MODIFIED TO PROVIDE FOR AN EXTENSION OF ITS PRESENT MATURITY DAY OF DECEMBER 31, 1966, TO MAY 9, 1969.

IN BRIEF, THE CIRCUMSTANCES WHICH GIVE RISE TO YOUR QUESTION ARE UNDERSTOOD TO BE AS FOLLOWS:

THE S.S. MATSONIA, ALONG WITH A SISTER SHIP THE S.S. LURLINE, HAS BEEN OPERATED BY THE MATSON NAVIGATION COMPANY IN THE WEST COAST HAWAIIAN SERVICE. THE OPERATION IS REPORTED TO BE NO LONGER PROFITABLE, AT LEAST WITH TWO SHIPS. IN VIEW THEREOF, THE COMPANY HAS PROPOSED THE POSSIBILITY OF A SALE OF THE LURLINE AND RETENTION OF THE MATSONIA IN THE EXISTING SERVICE, PROVIDED, HOWEVER, THE EXISTING MORTGAGE INDEBTEDNESS ON THE MATSONIA CAN BE RESCHEDULED TO PROVIDE FOR REDUCED PAYMENTS OF THE EXISTING PRINCIPAL INDEBTEDNESS OVER A LONGER PERIOD OF TIME WITH THE BALANCE PAYABLE AT MATURITY. IN THE EVENT THIS CANNOT BE ACCOMPLISHED, IT IS ANTICIPATED THAT THE OPERATOR WILL SURRENDER THE MATSONIA AND CONTINUE THE EXISTING SERVICE WITH THE LURLINE.

THE PRESENT TOTAL PRINCIPAL MORTGAGE INDEBTEDNESS OUTSTANDING ON THE MATSONIA IS APPROXIMATELY $7,185,000, OF WHICH ABOUT $1,027,000 IS UNDER A FIRST MORTGAGE HELD BY YOUR ADMINISTRATION, AND $6,158,000 IS UNDER A SECOND MORTGAGE HELD BY THE CROCKER-ANGLO NATIONAL BANK AND OTHERS, WHICH IS INSURED BY YOUR ADMINISTRATION. BOTH MORTGAGES ARE "SOLE RECOURSE," WHICH MEANS THAT THE ONLY SECURITY THEREFOR IS THE VESSEL ITSELF. THE MATSONIA AT THE PRESENT TIME IS REPORTED TO BE WORTH SUBSTANTIALLY LESS THAN THE COMBINED BALANCES OF THE MORTGAGES, AND ITS SURRENDER BY THE OPERATOR WOULD RESULT IN AN IMMEDIATE CONSIDERABLE LOSS TO YOUR ADMINISTRATION. PROVIDED THE SECOND MORTGAGE CAN BE EXTENDED TO MAY 9, 1969, IT IS UNDERSTOOD THAT THE MATSON COMPANY IS WILLING, NOTWITHSTANDING THE "SOLE RECOURSE" PROVISION, TO PAY $1,800,000 OF THE FINAL PAYMENT DUE UNDER THE MORTGAGE. IN THE LIGHT OF THIS SITUATION, THEREFORE, IT WOULD APPEAR THAT THE FINANCIAL POSITION OF THE GOVERNMENT WITH RESPECT TO THE MATSONIA WOULD BE SUBSTANTIALLY IMPROVED SHOULD PAYMENTS ON THE SECOND MORTGAGE BY EXTENDED AS PROPOSED. YOU ALSO ADVISE THAT ONE OF THE FEATURES OF THE PROPOSAL, AS YOU UNDERSTAND IT, MAY BE THE PAYMENT OF A DEFERRAL FEE ON THE INDEBTEDNESS PAYABLE AFTER THE PRESENT MATURITY DATE OF THE MORTGAGE WHICH, IN ESSENCE, WOULD AMOUNT TO CONSIDERATION FOR THE RESCHEDULING OF PAYMENTS REQUIRED FOR A LOAN WHICH ALREADY EXISTS AND DOES NOT INDICATE, OR SERVE TO CREATE, A NEW LOAN.

THE DOUBT AS TO YOUR AUTHORITY TO AGREE TO MATSON'S PROPOSAL APPEARS TO ARISE FROM THE PROVISIONS OF SECTION 1106 OF THE ACT, 46 U.S.C. 1276, WHICH READS AS FOLLOWS:

NO PROVISION OF THIS TITLE SHALL BE CONSTRUED TO AUTHORIZE THE SECRETARY OF COMMERCE TO INSURE A MORTGAGE SECURING ANY LOAN OR ADVANCE MADE PRIOR TO THE ENACTMENT OF THIS TITLE, AND NO MORTGAGE SHALL BE INSURED FOR REFINANCING IN WHOLE OR IN PART ANY EXISTING MORTGAGE EXCEPT---

THERE THEN FOLLOW FOUR EXCEPTIONS WHICH ARE (1) WHERE A SUBSTANTIAL PART OF THE NEW MORTGAGE IS APPLIED TO NEW CONSTRUCTION, RECONDITIONING OR RECONSTRUCTION OF ONE OR MORE OF THE MORTGAGED VESSELS; (2) WHERE THE NEW MORTGAGE SECURES THE AMOUNT OF AN OUTSTANDING INSURED MORTGAGE ON A VESSEL PLUS THE AMOUNT OF AN ADDITIONAL LOAN FOR RECONDITIONING OR RECONSTRUCTING THE MORTGAGE VESSEL; (3) WHERE THE SECRETARY INSURES A NEW MORTGAGE FOR THE PURPOSE OF REFUNDING AN INSURED MORTGAGE; AND (4) WHERE THE MORTGAGE IS GIVEN TO FINANCE THE PURCHASE OF VESSELS ACQUIRED BY THE INSURANCE FUND AND TO SECURE LOANS FOR RECONDITIONING AND RECONSTRUCTING SUCH VESSELS. IN ADDITION, THERE ARE OTHER CONDITIONS APPLICABLE TO THE EXCEPTIONS AMONG WHICH IS THE CONDITION HERE APPLICABLE TO EXCEPTIONS (1), (2), AND (3) THAT THE NEW MORTGAGE NOT EXTEND BEYOND THE MATURITY OF THE EXISTING MORTGAGE.

IN VIEW OF THE ABOVE, THEREFORE, AND SINCE IN YOUR OPINION THE PROPOSAL IN QUESTION APPEARS NOT TO FALL WITHIN ANY OF THE EXCEPTIONS TO SECTION 1106 OF THE ACT, THE QUESTION IS WHETHER, BECAUSE OF THE LIMITATION OF SECTION 1106 THAT "NO MORTGAGE SHALL BE INSURED FOR REFINANCING IN WHOLE OR IN PART ANY EXISTING MORTGAGE INDEBTEDNESS, EXCEPT AS THEREIN STATED, THE SECRETARY WOULD BE PRECLUDED FROM CONTINUING THE INSURANCE OF A MORTGAGE UNDER A RESCHEDULING OF PAYMENTS. THAT IS TO SAY, DOES THE RESCHEDULING OF THE PAYMENT OF AN EXISTING INDEBTEDNESS AMOUNT TO A REFINANCING WITHIN THE MEANING OF THE ACT?

AS ORIGINALLY ENACTED, SECTION 1106 DID NOT INCLUDE THE ABOVE REFERRED-TO EXCEPTION (3), THE SO-CALLED "REFUNDING" EXCEPTION. THE COMMITTEE REPORT (HOUSE REPORT NO. 2168, 75TH CONG., 3D ESS., APRIL 20, 1938, PP. 28-29) REFERS TO THE ESTABLISHMENT OF A REVOLVING FUND OF $1,000,000, THE LIMIT OF $200,000,000 ON OUTSTANDING INSURANCE, AND THEN STATES:

* * * TO THE EXTENT OF $20,000,000 MORTGAGES SECURING EXISTING LOANS OR ADVANCES MAY BE INSURED IF COUPLED WITH NEW LOANS OR ADVANCES IN A SUBSTANTIAL AMOUNT OF THE TOTAL INDEBTEDNESS. OTHERWISE, NO AUTHORITY IS GIVEN TO INSURE MORTGAGES SECURING ANY LOAN OR ADVANCE MADE PRIOR TO ENACTMENT OF THIS TITLE OR ANY REFINANCING THEREOF. * * *

THE REPORT THEREAFTER CONTINUES BY STATING THAT THE INSURANCE PROVISIONS OF TITLE XI FOLLOW SUBSTANTIALLY SIMILAR PROVISIONS OF THE NATIONAL HOUSING ACT AS RECENTLY AMENDED, 12 U.S.C. 1701, ET SEQ., AND THE FIVE SECTIONS PRECEDING SECTION 1106 AND THE TWO FOLLOWING SECTIONS ARE SPECIFICALLY MENTIONED AS BEING SUBSTANTIALLY THE SAME AS SIMILAR PROVISIONS OF THE NATIONAL HOUSING ACT. SECTION 1106 IS THEN SPECIFICALLY MENTIONED, TOGETHER WITH THE $20,000,000 LIMITATION ON EXISTING INDEBTEDNESS. IN A PARAGRAPH DEALING SPECIFICALLY WITH SECTION 1106, THE REPORT CALLS ATTENTION TO THE $20,000,000 LIMITATION ON EXISTING INDEBTEDNESS, AND STATES THAT THE SECTION PROVIDES FOR INSURANCE OF "MORTGAGES SECURING LOANS IN ADDITION TO THESE SECURED BY MORTGAGES THERETOFORE EXISTING AND INSURED.' THE REPORT CONTINUES:

* * * NO SUCH "BAILING OUT" LIMITATIONS ARE IMPOSED UNDER THE NATIONAL HOUSING ACT. HOWEVER, THE PROPOSED LEGISLATION IS EXPERIMENTAL AND FOR THAT REASON THE COMMITTEE HAS THOUGHT IT WISE TO IMPOSE THESE LIMITATIONS AND OTHER RESTRICTIONS NOT FOUND IN THAT ACT.

YOU STATE THAT IN YOUR OPINION IF THE SECRETARY OF COMMERCE HAS INSURED A MORTGAGE UNDER TITLE XI, AND IF THE ACTION PROPOSED IS MERELY THE RESCHEDULING OF PAYMENTS OF EXISTING INDEBTEDNESS UNDER SUCH MORTGAGE AND DOES NOT INVOLVE THE MAKING OF A NEW MORTGAGE AND A NEW LOAN IN WHOLE OR IN PART, AND IF THE RESCHEDULED MORTGAGE PAYMENTS, LIKE THE ORIGINAL MORTGAGE PAYMENTS, ARE SATISFACTORY TO THE SECRETARY AND FALL WITHIN THE SPECIFIED ELIGIBILITY REQUIREMENTS OF TITLE XI, SUCH ACTION WOULD NOT BE PROHIBITED BY SECTION 1106 BUT WOULD BE JUSTIFIED UNDER THE AUTHORITY GRANTED FOR THE ADMINISTRATION OF TITLE XI. WE CONCUR IN THIS VIEW FOR THE FOLLOWING REASONS:

AS OBSERVED BY YOU, OTHER THAN THE ABOVE REFERENCES TO THE CONGRESSIONAL FILES, A THOROUGH REVIEW OF THE LEGISLATIVE HISTORY FAILS TO DISCLOSE ANY CONCLUSIVE EVIDENCE AS TO WHETHER THE QUOTED PROVISIONS OF SECTION 1106 WERE INTENDED TO APPLY IN A SITUATION OF THIS KIND. UNDER THE CIRCUMSTANCES, THEREFORE, WE BELIEVE THE QUESTION CAN ONLY BE RESOLVED BY CONSIDERATION OF THE LANGUAGE OF THE STATUTE ITSELF, AND BY PLACING ON THAT LANGUAGE THE INTERPRETATION WHICH, IN OUR VIEW, WILL BEST BESPEAK THE APPARENT INTENT OF THE CONGRESS IN CONNECTION WITH A CONSIDERATION OF THE BASIC PURPOSE AND POLICY OF THIS TITLE OF THE ACT AS A WHOLE. VIEWED IN THIS LIGHT, WE ARE PERSUADED TO WHAT WE BELIEVE TO BE THE LOGICAL ASSUMPTION THAT SUCH PROHIBITION WAS DESIGNED PRIMARILY FOR THE PURPOSE OF PREVENTING A BORROWER FROM INDULGING IN THE PRACTICE OF INDISCREETLY INCREASING HIS LOAN BY A CONTINUOUS ISSUANCE OF MORTGAGES TO A LEVEL WHICH ULTIMATELY WOULD LEAD TO DEFAULT, THEREBY CULMINATING IN AN UNWARRANTED LOSS TO THE GOVERNMENT THROUGH ITS INSURANCE LIABILITY TO THE LENDER. ALSO, WE DO NOT BELIEVE IT WAS INTENDED BY THE CONGRESS THAT THE GOVERNMENT SHOULD INSURE A MORTGAGE ON AN EXISTING VESSEL OTHER THAN AS CONTEMPLATED BY THE EXCEPTIONS IN SECTION 1106 AND BY SECTION 1107 (46 U.S.C. 1276 AND 1277), SINCE THE OBVIOUS PURPOSE OF TITLE XI WAS TO ENCOURAGE PRIVATE FINANCING IN THE CONSTRUCTION, RECONSTRUCTION OR RECONDITIONING OF VESSELS. IN OTHER WORDS, UPON READING SECTION 1106 TOGETHER WITH THE EXCEPTIONS THERETO, IT BECOMES APPARENT THAT THIS PROVISION WAS INCORPORATED PURELY FOR THE PURPOSE OF PROTECTING THE INTERESTS OF THE GOVERNMENT. CONVERSELY, IN OUR OPINION, IT WOULD APPEAR UNREALISTIC TO PRESUME THAT THE CONGRESS INTENDED TO PRECLUDE THE GOVERNMENT FROM PURSUING A COURSE OF ACTION TO PROTECT ITS INTERESTS, SUCH AS IS PROPOSED IN THE INSTANT CASE. OTHERWISE, THAT PORTION OF SECTION 207 OF THE ACT WHICH VESTS IN THE COMMISSION BROAD AUTHORITY TO TAKE SUCH STEPS AS NECESSARY TO PROTECT, PRESERVE OR IMPROVE COLLATERAL TO SECURE INDEBTEDNESS WOULD BE MEANINGLESS.

IN VIEW THEREOF, WE MUST CONCLUDE THAT (1) SINCE NO NEW MORTGAGE IS BEING ISSUED FOR THE PURPOSE OF INCREASING THE LOAN, THE PROPOSAL SUBMITTED WOULD NOT COME WITHIN THE PROHIBITION AS CONTEMPLATED BY SECTION 1106 OF THE ACT, 46 U.S.C. 1117, AND (2) SINCE IT IS REPORTEDLY ANTICIPATED THAT THE OPERATOR WILL SURRENDER THE VESSEL IN THE EVENT THIS CANNOT BE ACCOMPLISHED, IT WOULD APPEAR PLAUSIBLE FOR YOUR ADMINISTRATION TO EXERCISE THE ABOVE-MENTIONED AUTHORITY VESTED BY SECTION 207 IN TAKING APPROPRIATE STEPS TO PROTECT THE COLLATERAL TO THE PRESENT INDEBTEDNESS WHICH ULTIMATELY MAY BE ASSIGNED TO THE GOVERNMENT.