www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 May 13, 1994 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 94-23 TO: ALL APPROVED MORTGAGEES ATTENTION: Foreclosure Department SUBJECT: Implementation of Book Entry for Federal Housing Administration (FHA) Debentures PURPOSE This letter provides information on new legislative requirements governing the issuance of FHA debentures (securities) in book-entry form. Plans are underway by a development team to modify the FHA Debenture automated system to issue debentures in book-entry form within this fiscal year. The development team is comprised of members from the Department of Housing and Urban Development (HUD), the Bureau of the Public Debt (the Bureau) of the U.S. Treasury Department and the Federal Reserve Bank of Philadelphia (FRBP). BACKGROUND FHA debentures are registered or book entry, transferable securities which are valid and binding obligations, unconditionally guaranteed as to principal and interest by the U.S. Government. Since 1938, FHA has issued debentures in certificated form (instead of cash) to pay mortgagees of certain insured mortgages that have defaulted. Book-entry technology was first introduced in the 1970's as a replacement form of issuing certificated securities with the aid of the computer. Many firms in the financial industry, including the U.S. Treasury Department, converted to a computerized book-entry system because it was a much more efficient and time saving method. HUD was unable to convert the issuance of FHA debentures to book entry during that period due to legislative constraints. _____________________________________________________________________ 2 Finally, with enactment of the Housing and Community Development Act of 1992, HUD was granted the authority to issue FHA debentures in book-entry form, in lieu of the current certificated debentures. HOW WILL IT WORK? HUD intends to implement this authority with respect to issuance of all new debentures. Once this authority is implemented, the issuance of debentures resulting from the payment of mortgage insurance premiums with certificated debentures will also offered in book-entry form. In addition, holders of outstanding certificated debentures may, at their option, exchange such debentures for book-entry securities. After converting from definitive to book entry, holders would not be permitted to reconvert to definitive. A separate mortgagee letter will further explain how and when the exchange will take place. Book-entry debentures will be issued in the exact amount due and payable to the holder, with no cash adjustment. Transfer of debentures will be accomplished through book-entry notation and pledging transactions will be by nominee registration. WHAT ABOUT MY RIGHTS? Conversion to book-entry debentures will not adversely affect any ownership rights of debenture holders. Debentures, under the book-entry method, will continue to be marketable (e.g. transfers and pledges) and changes in ownership will very easily be accomplished by an assignment form which will be processed to the FRBP by the seller. AUTOMATED CLEARING HOUSE (ACH) FOR CASH PAYMENTS Under the new Debenture Book-Entry System, HUD is exercising its option to convert to the ACH Direct Deposit System as a means of payment to debenture holders for debenture interests (retroactive and semiannual) and maturities. This form of payment ensures direct deposit of funds to your bank account with immediate access to the cash, avoiding the workload associated with check handling and lost or stolen checks. Informational backup for each payment may be obtained from your bank and will also be provided by the FRBP. _____________________________________________________________________ 3 Each mortgagee who participates in the HUD debenture program is requested to complete the attached DIRECT DEPOSIT SIGN-UP FORM (one for each account number you have with the FRBP) and forward it to the address indicated on the form on or before _______ June 30, 1994. It is imperative that you sign-up now to avoid subsequent delays in receipt of funds. If you have already provided your ACH routing information to the FRBP for debenture related cash payments (interest and maturities), be sure you have submitted a separate form for each account number assigned to your institution. No payments will be made by check on book-entry issued debentures (nor certificated debentures once ACH information has been provided) after implementation of the book-entry process. In cases where the ACH routing information is not provided to the FRBP, cash payments will be put on hold. WE URGE THAT YOU ACT PROMPTLY IN THIS MATTER! BENEFITS By bringing the FHA debenture process into conformity with modern commercial practices, considerable savings will accrue both to the holders of debentures and the Federal government. The holders will realize the benefits of: (1) faster servicing of debenture issues, transfers, assignments and redemptions, (2) less expensive processing of checks and faster receipt of cash payments through ACH, and (3) the elimination of many security measures now required for handling and storage of negotiable instruments. If you have any questions about this letter, please contact Linda Milner (HUD) at (202) 708-1115. Questions regarding the ACH process, should be directed to Suzanne Furr (FRBP) at (215) 574-6699. Very sincerely yours Nicolas P. Retsinas Assistant Secretary for Housing - Federal Housing Commissioner Attachment _____________________________________________________________________ ATTACHMENT ___________________________________________________________________________ DIRECT DEPOSIT SIGN-UP FORM ******************************************************************** * * * * * * * * * * * * * * * * * * * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * * * * * * * * * * * * * * * * * * * ******************************************************************** ___________________________________________________________________________