B-122429, FEBRUARY 23, 1955, 34 COMP. GEN. 392

B-122429: Feb 23, 1955

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THE GOVERNMENT MAY INSURE A SECOND MORTGAGE GIVEN TO A PRIVATE LENDING INSTITUTION FOR RECONSTRUCTION OF A VESSEL WHICH WAS ACQUIRED BY PURCHASE FROM GOVERNMENT INSTEAD OF UNDER CONSTRUCTION CONTRACT. THE MARITIME ADMINISTRATION IS NOT PRECLUDED BY THE INSURANCE TERMINATION PROVISIONS OF SECTION 1105 (E) OF THE ACT OF SEPTEMBER 3. 1955: REFERENCE IS MADE TO YOUR LETTER OF DECEMBER 21. REQUESTING A DECISION ON TWO QUESTIONS WHICH HAVE ARISEN IN CONNECTION WITH THE DRAFTING OF PROPOSED REGULATIONS FOR SHIP MORTGAGE INSURANCE UNDER TITLE XI OF THE MERCHANT MARINE ACT. INSURANCE IS PERMITTED WHERE A SUBSTANTIAL PORTION OF THE TOTAL AMOUNT TO BE SECURED BY THE NEW MORTGAGE IS TO BE APPLIED TO NEW CONSTRUCTION.

B-122429, FEBRUARY 23, 1955, 34 COMP. GEN. 392

MARITIME ADMINISTRATION - SHIP MORTGAGE INSURANCE UNDER THE SHIP MORTGAGE INSURANCE PROVISIONS OF THE ACT OF SEPTEMBER 3, 1954, WHICH AMENDS THE MERCHANT MARINE ACT, 1936, THE GOVERNMENT MAY INSURE A SECOND MORTGAGE GIVEN TO A PRIVATE LENDING INSTITUTION FOR RECONSTRUCTION OF A VESSEL WHICH WAS ACQUIRED BY PURCHASE FROM GOVERNMENT INSTEAD OF UNDER CONSTRUCTION CONTRACT, AND THE EXTENT OF SUCH INSURANCE UNDER SECTION 1101 (F) OF SAID ACT MAY INCLUDE 90 PERCENT OF THE PURCHASE MONEY MORTGAGE REMAINING UNPAID PLUS 90 PERCENT OF 75 PERCENT OF THE RECONSTRUCTION COSTS. THE MARITIME ADMINISTRATION IS NOT PRECLUDED BY THE INSURANCE TERMINATION PROVISIONS OF SECTION 1105 (E) OF THE ACT OF SEPTEMBER 3, 1954, WHICH AMENDS THE MERCHANT MARINE ACT, 1936, FROM PROMULGATING REGULATIONS GOVERNING THE RESPONSIBILITIES AND OBLIGATIONS OF PRIVATE LENDING INSTITUTIONS UNDER SHIP MORTGAGE INSURANCE CONTRACTS WITH THE GOVERNMENT.

ASSISTANT COMPTROLLER GENERAL WEITZEL TO THE ADMINISTRATOR, MARITIME ADMINISTRATION, FEBRUARY 23, 1955:

REFERENCE IS MADE TO YOUR LETTER OF DECEMBER 21, 1954, REQUESTING A DECISION ON TWO QUESTIONS WHICH HAVE ARISEN IN CONNECTION WITH THE DRAFTING OF PROPOSED REGULATIONS FOR SHIP MORTGAGE INSURANCE UNDER TITLE XI OF THE MERCHANT MARINE ACT, 1936, AS ADDED BY SECTION 46 OF THE ACT OF JUNE 23, 1938, 52 STAT. 953, 969, AND AS AMENDED BY PUBLIC LAW 781, 83D CONGRESS, APPROVED SEPTEMBER 3, 1954, 68 STAT. 1267.

YOUR FIRST QUESTION CONCERNS THE EXTENT TO WHICH THERE MAY BE INSURED A MORTGAGE FOR THE REFINANCING OF AN EXISTING MORTGAGE INDEBTEDNESS AS AUTHORIZED BY EXCEPTION (1) TO THE GENERAL PROHIBITION AGAINST SUCH INSURANCE CONTAINED IN SECTION 1106 OF TITLE XI, 68 STAT. 1275, AS AMENDED. UNDER THE EXCEPTION (1), INSURANCE IS PERMITTED WHERE A SUBSTANTIAL PORTION OF THE TOTAL AMOUNT TO BE SECURED BY THE NEW MORTGAGE IS TO BE APPLIED TO NEW CONSTRUCTION, RECONSTRUCTION OR RECONDITIONING OF ONE OR MORE OF THE MORTGAGED VESSELS, PROVIDED THAT THE AGGREGATE AMOUNT OF ALL MORTGAGES SO INSURED AND OUTSTANDING AT ANY TIME SHALL NOT EXCEED $20,000,000, AND THAT ALL ELIGIBILITY REQUIREMENTS OF SECTION 1104 NOT INCONSISTENT WITH SAID EXCEPTION SHALL BE COMPLIED WITH.

IT IS INDICATED IN YOUR LETTER THAT THERE SHOULD BE NO QUESTION BUT THAT THE NEW MORTGAGE COULD BE INSURED, CONSISTENT WITH SECTION 1104, 68 STAT. 1269, AT LEAST TO THE EXTENT OF 90 PERCENT OF 75 PERCENT OF THE ACTUAL COST, AS DEFINED IN SECTION 1101 (F), 68 STAT. 1268, OF THE NEW CONSTRUCTION, RECONSTRUCTION OR RECONDITIONING. HOWEVER, PARTICULARLY IN THOSE INSTANCES WHERE THERE IS INVOLVED THE RECONSTRUCTION OR RECONDITIONING OF A COMPARATIVELY NEW VESSEL PURCHASED BY THE MORTGAGOR INSTEAD OF HAVING BEEN CONSTRUCTED PURSUANT TO ARRANGEMENTS MADE WITH THE SHIP BUILDER, THE QUESTION IS PRESENTED AS TO WHETHER THE INSURANCE MAY ALSO INCLUDE 90 PERCENT OF THE REMAINING PURCHASE MONEY MORTGAGE INDEBTEDNESS.

AS AN EXAMPLE OF THE PROBLEM INVOLVED, THE SPECIFIC QUESTION IS RAISED AS TO THE AMOUNT OF INSURANCE AVAILABLE IN THE EVENT THAT A MARINER IS BOUGHT FROM THE GOVERNMENT UNDER TITLE VII SOON AFTER DELIVERY FROM THE BUILDER, AND THE PURCHASER GIVES THE GOVERNMENT A PURCHASE MONEY MORTGAGE OF $3,000,000 (75 PERCENT OF ITS PURCHASE PRICE) BUT LATER PAYS $4,000,000 FOR RECONSTRUCTION OF THE VESSEL. ASSUMING THAT NO PART OF THE PURCHASE MONEY MORTGAGE INDEBTEDNESS HAS BEEN PAID, THE QUESTION IS WHETHER THE GOVERNMENT MAY INSURE THE NEW MORTGAGE TO THE EXTENT OF 90 PERCENT OF $6,000,000, REPRESENTING THE AMOUNT OF THE ORIGINAL INDEBTEDNESS, PLUS 75 PERCENT OF THE ACTUAL COST OF RECONSTRUCTION. APPARENTLY, OUT OF THE TOTAL OF THE NEW LOAN, THE PURCHASER WOULD PAY THE GOVERNMENT THE SUM OF $3,000,000, PLUS ACCRUED INTEREST, FOR RELEASE OF THE PURCHASE MONEY MORTGAGE.

WHILE YOU SUGGEST THAT SECTIONS 1101 (F) AND 1104 (A) (8), 68 STAT. 1270, APPEAR IN SOME RESPECTS TO PRECLUDE INSURANCE OF MORTGAGES FOR RECONSTRUCTION PURPOSES WHERE A VESSEL IS ACQUIRED BY PURCHASE INSTEAD OF UNDER A CONSTRUCTION CONTRACT, WE AGREE WITH THE POSITION TAKEN IN YOUR LETTER THAT THE SITUATION INVOLVING THE PURCHASE AND RECONSTRUCTION OF THE MARINER IS TANTAMOUNT TO NEW CONSTRUCTION. INSOFAR AS CONCERNS YOUR BASIC QUESTION, IT WOULD SEEM CLEAR THAT THE PHRASE ,TOTAL AMOUNT TO BE SECURED BY THE NEW MORTGAGE," AS USED IN SECTION 1106 (1), WAS MEANT TO INCLUDE THE UNPAID BALANCE OF THE ORIGINAL MORTGAGE. IN SUPPORT OF THIS CONCLUSION, NO COMMENT APPEARS NECESSARY OTHER THAN TO REFER TO A STATEMENT APPEARING ON PAGE 28 OF HOUSE REPORT NO. 2168, 75TH CONGRESS, 3D SESSION, REPORTNG ON THE BILL WHICH, AS ENACTED ON JUNE 23, 1938, ADDED TITLE XI. IT IS STATED IN SAID REPORT THAT " 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.' (ITALICS SUPPLIED.)

ACCORDINGLY, IT IS OUR VIEW THAT INSURANCE UNDER SECTION 1106 (1) WOULD BE AVAILABLE TO THE EXTENT OF 90 PERCENT OF $6,000,000 UNDER THE CIRCUMSTANCES SET FORTH IN THE ABOVE HYPOTHETICAL CASE, SUBJECT TO YOUR DETERMINATION THAT THE TOTAL INSURANCE WOULD BE ECONOMICALLY SOUND AND WOULD OTHERWISE SUBSTANTIALLY MEET THE PERCENTAGE OF ACTUAL COST REQUIREMENTS OF SECTION 1101 (F), AND PROVIDED, OF COURSE, THAT THERE IS OBSERVED THE $20,000,000 LIMITATION INVOLVED.

THERE HAVE BEEN NOTED YOUR COMMENTS RELATIVE TO INSURANCE OF SECOND MORTGAGES FOR THE FINANCING OF NEW CONSTRUCTION, RECONSTRUCTION OR RECONDITIONING. WHERE, AS HERE, THE GOVERNMENT IS THE MORTGAGEE UNDER A PURCHASE MONEY MORTGAGE, IT WOULD APPEAR, ON THE BASIS THAT THE GOVERNMENT IS ITS OWN INSURER OF SUCH A MORTGAGE, THAT INSURANCE OF A SECOND MORTGAGE GIVEN TO A PRIVATE LENDING INSTITUTION AS SECURITY FOR A LOAN TO COVER RECONSTRUCTION COSTS WOULD BE CONSISTENT WITH THE PROVISIONS OF SECTION 1106 (2), 68 STAT. 1275. THAT SECTION PERMITS REINSURANCE OR THE INSURANCE OF AN ADDITIONAL SUM WHEN THE MORTGAGOR "MAKES APPLICATION TO THE MORTGAGEE OR ANOTHER LENDER FOR AN ADDITIONAL LOAN OR ADVANCE FOR RECONDITIONING OR RECONSTRUCTING THE MORTGAGED PROPERTY.'

THE SECOND QUESTION PRESENTED IN YOUR LETTER CONCERNS THE PROVISION IN SECTION 1105 (E), 68 STAT. 1274, THAT ANY CONTRACT OR COMMITMENT OF INSURANCE SHALL NOT BE TERMINATED, CANCELED OR OTHERWISE REVOKED FOR ANY REASON EXCEPT AS PROVIDED IN SECTION 1105. THAT SECTION PROVIDES FOR TERMINATION OF INSURANCE UPON CERTAIN CONDITIONS WHERE THE MORTGAGOR IS IN DEFAULT. YOU STATE THAT IT IS DESIRABLE, IF NOT NECESSARY, TO PROVIDE IN THE PROPOSED REGULATIONS FOR TERMINATION IF THE MORTGAGEE OR LENDER FAILS TO PAY INSURANCE PREMIUMS TO THE GOVERNMENT, OR IF THE MORTGAGEE OR LENDER OTHERWISE FAILS TO PERFORM ITS OBLIGATIONS UNDER THE INSURANCE COMMITMENT, SUCH AS WHERE THE MORTGAGEE FAILS TO GIVE NOTICE OF DEFAULT BY THE MORTGAGOR IN FURNISHING REQUIRED INSURANCE CERTIFICATES.

THE LEGISLATIVE HISTORY OF THE AMENDMENTS EFFECTED BY THE ACT OF SEPTEMBER 3, 1954, SHOWS THAT SECTION 1105 (E) WAS DESIGNATED FOR THE PURPOSE OF ASSURING PRIVATE LENDING INSTITUTIONS THAT THE GOVERNMENT WOULD HONOR ITS CONTRACTS OR COMMITMENTS OF INSURANCE REGARDLESS OF ANY DEFAULTS ON THE PART OF MORTGAGORS OR OTHER BORROWERS, AND THAT THE TERMS OF ANY SUCH CONTRACTS OR COMMITMENTS, WOULD BE FINAL AND CONCLUSIVE, UPON THE PARTIES, EXCEPT FOR FRAUD, DURESS OR MUTUAL MISTAKE OF FACT. HOWEVER, IT SEEMS OBVIOUS THAT IT WAS NEVER INTENDED THAT A CONTRACT OR COMMITMENT OF INSURANCE SHOULD NOT IMPOSE CERTAIN OBLIGATIONS ON THE LENDING INSTITUTION, OR THAT THE INSURANCE AGREEMENT SHOULD NOT GIVE THE GOVERNMENT THE RIGHT TO TERMINATE THE AGREEMENT IF THE LENDING INSTITUTION FAILS TO PERFORM SUCH OBLIGATIONS.

THUS, IT IS APPARENT THAT REGULATIONS GOVERNING THE RESPONSIBILITIES OF LENDING INSTITUTIONS ARE REQUIRED UNDER TITLE XI, AND THAT, DEPENDING UPON THE REASONABLENESS OF SUCH REGULATIONS, THEY COULD NOT BE HELD IMPROPER ON THE BASIS OF THE RULINGS MADE IN THE CITED CASES OF A. H. BULL STEAMSHIP COMPANY V. UNITED STATES, 123 C.1CLS. 520, AND SOUTHERN OIL FLORIDA, INC., ET AL. V. UNITED STATES, 127 C.1CLS. 409, WHICH INVOLVED REGULATIONS FOUND TO BE DIRECTLY IN CONFLICT WITH STATUTORY PROVISIONS.

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