FERRELL v. PIERCE

No. 73 C 334

560 F. Supp. 1344 (1983) | Cited 0 times | N.D. Illinois | April 7, 1983

MEMORANDUM OPINION

This class action was instituted in 1973 to assert variousalleged rights to foreclosure avoidance relief of the plaintiffclass of low and moderate income families who had purchased homeswith insured home mortgages under specified sections of theNational Housing Act. In 1976, plaintiffs and the then-remainingdefendants, the United States Department of Housing and UrbanDevelopment (hereinafter "HUD" or "the Department") and certainof its officials, theoretically settled the lawsuit. As part ofthe settlement, HUD agreed to implement a revised policy foraccepting assignments of insured mortgages in default in order toprovide foreclosure avoidance assistance to members of theplaintiff class. Our order, dated July 29, 1976, approved thesettlement and dismissal and incorporated by reference theparties' stipulation detailing HUD's obligations with respect tomortgage assignments.

Thereafter, from time to time, the plaintiffs objected to HUD'salleged violations of the July 1976 order. Finally, in August1979, the parties agreed to an Amended Stipulation which weapproved in November of that year. In the Amended Stipulation,HUD acknowledged that there had been "a significant incidence oferror in the administration of the [assignment] program" andagreed subsequently to administer that program in accordance withan internal manual, HUD Handbook No. 4191.2, later renumbered asHUD Handbook 4330.2 (hereinafter "the Handbook"), which had beenreviewed by counsel for the plaintiff class and was incorporatedby reference in the Amended Stipulation.

This matter is before us again on defendants' motion to modifyour November 1979 order incorporating and approving the AmendedStipulation and on the plaintiffs' motion to hold the defendantsin civil contempt for violation of the Amended Stipulation. Weheld a hearing on both motions commencing on September 30, 1982,and have subsequently received briefs from the parties. For thereasons hereinafter stated, defendants' motion to modify theAmended Stipulation is denied. The defendants are enjoined fromimplementing certain proposed regulations relating to TemporaryMortgage Assistance Payments and Assignments to HUD as previouslypublished, 47 Fed.Reg. 33252 (1982). Plaintiffs' motion forcontempt is also denied.

The Amended Stipulation

The Amended Stipulation, which is the focus of both motions,provides in paragraph 3 for HUD's operation of a mortgageassignment program consistent with the terms of the Handbook.Paragraph 3 provides:

HUD Handbook 4191.2, attached hereto as Appendix A, shall constitute binding instructions for implementation of the assignment program subsequent to the entry of this order. The Department shall administer the assignment program substantially in accordance with the terms of said Handbook. . . . The provisions of the Handbook may be modified in accordance with the Department's usual procedures. However, during the term of this Amended Stipulation the Department will not make any modification which would curtail the basic rights of mortgagors under the program now in existence. The Department will give notice to plaintiffs' counsel prior to final action on any modification.

The duration of the obligations created by the AmendedStipulation is set out in paragraph 14 of that agreement, whichprovides:

Except as provided in this paragraph, the rights and obligations created by this Amended Stipulation shall terminate five years from date of execution. The termination of the Department's specific obligations under this Amended Stipulation shall not diminish or compromise the Department's obligation construed under the National Housing Act as amended, and Section 2 of the Housing Act of 1949 and Section 2 of the Housing and Urban Development Act of 1968 to provide foreclosure avoidance relief for mortgagors in temporary financial distress, and the Department shall provide assistance or relief in the form of the present assignment program or an equivalent substitute to permit mortgagors in default on their mortgages to avoid foreclosure and to retain their homes during periods of temporary financial distress.

The Handbook, which is incorporated in the Amended Stipulation,sets out procedures for HUD's acceptance of assignments. It listsfive eligibility criteria for preforeclosure mortgage assignmentassistance, the two most important of which are that thecircumstances leading to default have been beyond the mortgagor'scontrol and that there be a "reasonable prospect" that themortgagor will be able to resume full mortgage payments followinga 36-month period of full or partial forbearance. The Handbookalso purports to describe the required terms for mortgagepayments to HUD on assigned mortgages. Those Handbook provisionsrelating to the terms of payment and other relevant provisionsare set out and discussed in some detail hereafter.

The Amended Stipulation further provides that HUD will maintainand furnish to the plaintiffs' counsel monthly statisticalreports on the processing of applications for assignment. AmendedStipulation ¶ 9. The monthly reports are to show the number ofapplications HUD has received, the number of assignments actuallyaccepted and the number referred back to the mortgagee for whatis termed "further servicing." They further indicate, withrespect to mortgages accepted for assignment, whether themortgagor has had payments reduced or suspended or is making afull or increased mortgage payment to HUD.

Statutory Developments

The statutory authority for the Department's operation of amortgage assignment program was, at the time of the AmendedStipulation, contained in former Section 230 of the NationalHousing Act, 12 U.S.C. § 1715u (1968), which provided inpertinent part:

Upon receiving notice of the default of any mortgage covering a one-, two-, three-, or four-family residence heretofore or hereafter insured under this chapter, the Secretary, in his discretion and for the purpose of avoiding foreclosure of the mortgage, and notwithstanding the fact that he has previously approved a request of the mortgagee for an extension of time for curing the default and of the time for commencing foreclosure proceedings or for otherwise acquiring title to the mortgaged property, or has approved a modification of the mortgage for the purpose of changing the amortization provisions by recasting the unpaid balance, may acquire the loan and security therefor upon payment of the insurance benefits in an amount equal to the unpaid principal balance of the loan plus any unpaid mortgage interest plus reimbursement for such costs and attorney's fees as the Secretary finds were properly incurred in connection with the defaulted mortgage and its assignment to the Secretary, and for any proper advances theretofore made by the mortgagee under the provisions of the mortgage.

As is apparent from a previous opinion in this case, HUD has astatutory obligation which formed the basis for the AmendedStipulation to provide mortgage foreclosure avoidance relief ina manner that will advance the national housing policy, stated in42 U.S.C. § 1441, of providing a decent home and suitable livingenvironment for every American family. Brown v. Lynn, 385 F. Supp. 986,998-99 (N.D.Ill. 1974).

Congress has since enacted the Housing and CommunityDevelopment Act of 1980, P-L 96-399, 94 Stat. 1614, 1659, whichamends Section 230 of the National Housing Act, 12 U.S.C. § 1715u(hereinafter "section 230" or "amended section 230") to permitHUD to provide foreclosure avoidance relief in the form ofTemporary Mortgage Assistance Payments (TMAP) to lendinginstitutions on behalf of eligible mortgagors as well as in thepreviously provided for form of mortgage assignment. Under TMAP,the mortgagee retains the mortgage and receives payments fromHUD. Under the assignment program, the mortgage itself isconveyed to HUD, which arranges terms for the mortgagor to makepayments to it. The amended version of section 230 now allows forprovision of the TMAP form of mortgage foreclosure avoidanceassistance under the same conditions as those under whichassignment was available under the earlier statute, asimplemented by the Handbook. Paragraph (a)(1) of the statute asamended provides:

(a)(1) Upon receiving notice of the default of any mortgage covering a one-, two-, three-, or four-family residence insured under this chapter, the Secretary (for the purpose of avoiding foreclosure of the mortgage, and notwithstanding the fact that the Secretary has previously approved a request of the mortgagee for an extension of the time for curing the default and of the time for commencing foreclosure proceedings or for otherwise acquiring title to the mortgaged property, or has approved a modification of the mortgage for the purpose of changing the amortization provisions by recasting the unpaid balance) may make all or part of the monthly payments due under the mortgage directly to the mortgagee on behalf of the mortgagor, if such default was caused by circumstances which are beyond the mortgagor's control and render the mortgagor temporarily unable to correct a mortgage delinquency and to resume full mortgage payments. Payments may be made only in accordance with the provisions of this subsection and shall be subject to any additional requirements the Secretary may prescribe.

The additional restriction on eligibility for relief now on theface of the statute — that the default shall have been caused bycircumstances beyond the mortgagor's control which render themortgagor temporarilyunable to correct the delinquency and resume full payments — isa codification of an eligibility criterion contained in theHandbook implementing the assignment program under the previousstatute. See Handbook ¶ 2-1(d).1

Amended section 230 now codifies the "reasonable prospect"criterion now contained in the Handbook ¶ 2-1(e).2 Paragraph(a)(2) now provides:

(2) No payments may be provided under this subsection unless the Secretary has determined that such payments are necessary to avoid foreclosure and that there is a reasonable prospect that the mortgagor will be able —

(A) to resume full mortgage payments within thirty-six months after the beginning of the period for which such payments are provided or upon termination of assistance under this subsection;

(B) to commence repayment of the payments made under this subsection at a time designated by the Secretary; and

(C) to pay the mortgage in full by its maturity date or by a later date established by the Secretary for completing the mortgage payments.

Although the wording of the statute is different from that in theHandbook and although the statute, in subparagraph (a)(2)(C),does not set a 10-year limit on possible mortgage term extension— as does the Handbook ¶ 2-1(e) — it is apparent that thedifferences are immaterial to operation of a TMAP programequivalent to the assignment program envisioned by the Handbook.

Paragraph (a)(3) provides for a level of assistance "in anamount determined by the Secretary" that may be as much as thetotal principal and interest due under the mortgage plusenumerated additional taxes, assessments and other expenses. Thesubsection provides:

(3) Payments under this subsection may be in an amount determined by the Secretary up to the amount of the principal, interest, taxes, assessments, ground rents, hazard insurance, mortgagee's expenses in connection with payments or repayments under this subsection, and mortgage insurance premiums due under the mortgage, and the initial payment may include an amount necessary to make the payments on the mortgage current. Payments may not exceed amounts which the Secretary determines to be necessary to supplement the amounts, if any, which the mortgagor is capable of contributing toward the mortgage payments.

Paragraph (a)(4) governs the duration of TMAP. This paragraphprovides for an initial limit of 18 months after default on theperiod for which payments may be made on behalf of a mortgagorand for extension of the initial assistance period by up to 18more months. Provision is made for periodic review of themortgagor's need during the assistance period. Paragraph (a)(4)provides:

(4) Payments under this subsection may be provided for a period of not to exceed eighteen months, and any period of default. Such period may be extended, in the Secretary's discretion, for not to exceed eighteen months where the Secretary has determined that such extension is necessary to avoid foreclosure and that there is a reasonable prospect that the mortgagor will be able to make the payments and repayments specified in paragraph (2) of this subsection. The Secretary shall establish procedures for periodic review of the mortgagor's financial circumstances for the purpose of determining the necessity for continuation, termination, or adjustment in the amount of the payments. Payments shall be discontinued at any time when the Secretary determines that, because of changes in the mortgagor's financial circumstances, the payments are no longer necessary to avoid foreclosure or that there is no longer a reasonable prospect that the mortgagor will be able to make the payments and repayments specified in paragraph (2) of this subsection.

These limitations on assistance are structurally similar to thelimitations on the period of reduced or suspended payments asoutlined in the Handbook ¶¶ 5-1 and 5-3.

Repayment of assistance is covered in paragraph (a)(5). Thatsubsection directs the Secretary to secure his assistance by alien on the property. The Secretary is given virtually completediscretion with respect to the level of interest charged onassistance and with respect to the terms of repayment. The onlyrestriction is a maximum limit on the interest charged onassistance; that rate may not exceed the maximum FHA interestlevel computed under section 203(b) of the Housing Act, 12 U.S.C. § 1709(b).Paragraph (a)(5) provides:

(5) All payments shall be secured by a lien on the property and by such other obligations as the Secretary may require. Payments shall be repayable upon terms and conditions prescribed by the Secretary, and such terms and conditions may include requirements for repayment of any amount paid by the Secretary toward a mortgagee's expenses in connection with the payment or repayments made under this subsection. The Secretary may establish interest charges on payments made under this subsection; except that such charges shall not exceed a rate which is more than the maximum interest rate applicable with respect to level payment mortgages insured pursuant to section 1709(b) of this title at the time assistance under this section is approved by the Secretary. Such charges shall be payable notwithstanding any provision of any State constitution or law or local law which limits the rate of interest on loans or advances of credit.

Finally, paragraph (a)(6) provides for repeated cycles ofassistance on behalf of a mortgagor only in cases where thatmortgagor has made full payments for 12 months followingtermination of the previous assistance. The language of paragraph(a)(6) is as follows:

(6) Payments under this subsection may be made without regard to whether the Secretary has previously taken action to avoid mortgage acquisition or foreclosure, except that payments may be provided on behalf of a mortgagor previously assisted under this section only in cases in which full mortgage payments (and any repayments to the Secretary which may have been requested) have been made by such mortgagor for at least 12 months from the time such previous assistance under this section was terminated.

As noted above, the amended version of section 230 provides forcontinued operation of the assignment program. Paragraph (b)(1)of the amended section now states in pertinent part:

(b)(1) When the Secretary receives notice of a default described in subsection (a)(1) of this section and makes a determination that assistance under subsection (a) of this section would be inappropriate in the case of the mortgagor, the Secretary (for the purpose of avoiding foreclosure of the mortgage, and notwithstanding the facts described in the parenthetical material contained in subsection (a)(1) of this section and the fact that payments have been made under subsection (a) of this section with respect to the mortgage) shall, if determined necessary by the Secretary, acquire the mortgage and security therefor upon payment of the insurance benefits in an amount equal to the unpaid principal balance of the mortgage plus any unpaid mortgage interest and reimbursement for such costs and attorney's fees as the Secretary finds were properly incurred in connection with the defaulted mortgage and its assignment to the Secretary, and for any proper advances theretofore made by the mortgagee under the provisions of the mortgage. After the acquisition of such mortgage by the Secretary, the mortgagee shall have no further rights, liabilities, or obligations with respect thereto.

The conditions under which assignment is now available areidentical to those under the previous statute, except for thefurther requirement that assignments are now to be accepted onlywhere the Secretary determines that TMAP is "inappropriate."

Paragraph (b)(2) sets out durational limits on the period ofreduced or suspended payments that may be provided for mortgagesaccepted for assignment. The statute provides that the initial18-month period of reduced or suspended payments may be extendedby up to 18 additional months where the eligibility criteriacontinue to be met. Compare section 230(a)(4). These durationallimits also parallel those in the Handbook. See Handbook ¶¶ 5-1,5-3. Paragraph (b)(2) also gives the Secretary broad discretionto structure repayment plans for assigned mortgages and allowsfor interest on assistance but only at a rate at or below the FHAmaximum. Compare section 230(a)(5). Paragraph (b)(2) reads asfollows:

(2) The Secretary may provide assistance, to a mortgagor whose mortgage has been acquired under paragraph (1) of this subsection, through forebearance of interest or principal, or both, or through other means, for a period of not more than eighteen months after the acquisition of the mortgage, if the mortgagor has not been assisted under subsection (a) of this section within twelve months of the date of such acquisition and if the Secretary determines that there is a reasonable prospect that the mortgagor will be able to meet the conditions described in subsection (a)(2) of this section. Such period may be extended, in the Secretary's discretion, for not to exceed eighteen months where the Secretary has determined that such extension is necessary to avoid foreclosure and that there is a reasonable prospect that the mortgagor will be able to meet the conditions described in subsection (a)(2) of this section. Such assistance (which may include any expenses of the Secretary incurred in connection with providing such assistance) shall be repayable upon terms and conditions prescribed by the Secretary, except that in no event shall any interest rate charged on such repayments exceed the interest rate chargeable for repayments of assistance made under subsection (a) of this section. Such rate shall be payable notwithstanding any provision of any State constitution or law or local law which limits the rate of interest on loans or advances of credit.

Paragraph (b)(3) of the amended statute allows the Secretary toacquire a mortgage with respect to which TMAP had been providedin order to permit extension of the mortgage term. That paragraphstates:

(3) In carrying out paragraph (1), the Secretary shall, if determined necessary by the Secretary, acquire a mortgage, with respect to which assistance was being provided under subsection (a) of this section immediately prior to such acquisition, for the sole purpose of extending the term of repayment under the mortgage so that the mortgagor will be able to make the full payments on the mortgage.

The amended section 230 also contains subsections (c) and (d)relating respectively to funding for the programs andhome-ownership counseling. Neither is directly pertinent to themotions before us today.

The 1980 housing amendments leave unaltered the obligatorynational housing policy as stated in 42 U.S.C. § 1441. Theforegoing analysis of the amendment of section 230 makes clear —and HUD does not contend to the contrary — that, with thepossible exception of the limitations on subsequent assistancecontained in paragraphs (a)(6) and (b)(2), the statute is notinconsistent with the continued provision of a mortgageforeclosure avoidance program as widely available and of as higha quality as the one currently in operation.

Moreover, our review of the legislative history of the 1980amendments confirms the conclusion that Congress did not intendto cut back on the availability and quality of mortgageforeclosure avoidance assistance. Amendment of section 230 wasinitially proposed by HUD officials who envisioned that thesuggested TMAP program would become "the predominant foreclosureavoidance mechanism to the maximum extent possible consistentwith [HUD's] . . . obligations under its Assignment Program" andthat it would eventually supersede the assignment programaltogether. See HUD Proposed Legislation and Commentary at 29,34, 39.3 The House of Representatives did not adopt the HUDproposal and instead passed legislation substantially identical4to the amended version of section 230 described above. The HouseProposal, H.R. 2719, specifically retained the assignment programand made no provision for that program's termination.

The House of Representatives Banking, Finance and Urban AffairsCommittee Report on H.R. 72625 emphasized that the amendinglegislation was not intended to affect the viability of mortgageforeclosure avoidance relief:

In designing TMAP the Committee has attempted to conform as closely as possible to the existing requirements of the assignment program. What the Committee has sought to do is assure that the assistance accorded to homeowners under both programs will be virtually the same. In essence the two approaches differ only in who actually holds the mortgage — under assignment it is the Secretary and under TMAP it is the private lender. The Committee has taken care to assure that the current structure, requirements and approach of the assignment program will not be altered by this legislation. [Emphasis added.]

House Report No. 96-979, 96th Cong. 2d Sess. at 53-54. Accordingto that report, the amending legislation was intended to allowHUD to implement a lower cost alternative to the assignmentprogram which would provide equally effective foreclosureavoidance relief. Id. at 51.

After passage, the House bill was apparently referred to aConference Committee which produced the changes referred to infootnote 4, supra. The Conference Committee also indicatedunequivocally that the purpose of the amendments to section 230was not to make assistance under that section more difficult toobtain, but only to provide a possibly lower cost alternative tothe assistance the Department was already authorized and requiredto provide. House Report No. 96-1420, 96th Cong. 2d Sess. at 123,U.S.Code Cong. & Admin.News 1980, p. 3506. The ConferenceCommittee further "expect[ed] the Secretary to take steps toassure that assistance provided under TMAP [be] consistent withthe relief provided under assignment, and to avoid inequities."Id. at 122, U.S.Code Cong. & Admin.News, p. 3667.

Following enactment, on September 30, 1980, of the amendmentsto section 230, HUD, on August 2, 1982, promulgated andpublished, see 47 Fed.Reg. 33242 (1982), the TMAP implementingregulations for which it now seeks our approval. The proposed newregulations provide inter alia for the rate and accrual date forinterest charged both on TMAP and on mortgage assignmentforeclosure assistance. They indicate that HUD has totaldiscretion with respect to the level of assistance provided underboth programs; they provide for determination of a date ofdefault for purposes of establishing whether the default was theresult of "circumstances beyond the mortgagor's control" and setout additional assistance eligibility requirements. The proposedregulations provide for review of the payment plans establishedunder both programs and they establish procedures for repaymentof both forms of assistance.Specific objections to the proposed regulations are analyzed indetail below.

Defendants propose that the Amended Stipulation be modified toinclude a new paragraph 16 which would provide:

16. Nothing in this Amended Stipulation affects or interferes in anyway [sic] with the Department's implementation of the TMAP program as authorized by Public Law 96-399.

Defendants ask that they be permitted to implement the proposedregulations pertaining to TMAP and the assignment program. Themodification and implementation are opposed by the plaintiffs whocontend that the regulations are inconsistent with HUD'sobligation under the Amended Stipulation to operate theassignment program or provide equivalent mortgage foreclosureavoidance relief. See Amended Stipulation ¶¶ 3, 14.

Motion for Contempt

Before reaching the merits of the contentions with respect toHUD's future obligations, we turn to the not unrelated question,raised by the plaintiffs' pending civil contempt motion, of thesatisfactoriness of HUD's performance to date under the formerstatutory scheme. Plaintiffs proceed in their civil contemptmotion on two apparently independent theories.

Their first argument is based on the monthly statisticalreports of HUD's action on mortgage assignment applications,which — they argue — show that in the period beginning in August1981, the number of applications accepted dramatically decreased.The plaintiffs argue that this marked drop in the acceptancelevel constitutes clear and convincing evidence that HUD hasfailed to operate the mortgage assignment program in good faithin accordance with the terms of the Handbook, as the AmendedStipulation requires.

The plaintiffs' statistical evidence, which was presented atthe hearing on this matter and not seriously disputed, doesreveal an unpredicted and unfortunate drop in the number ofmortgage assignments accepted by HUD in the seventeen monthperiod beginning in August 1981. The plaintiffs' expert dividedthe monthly statistical data provided by the defendants intothree time periods. The first, May 1976 through January 1979, wasa period for which HUD later conceded, see Amended Stipulation atp. 2, that there were serious deficiencies in the administrationof the assignment program. In that period, 18% of the total casesprocessed were accepted for assignment; in 23.1% of the cases,the application was referred to the mortgagee as a result of themortgagee's agreement to forego foreclosure and continue themortgage, see Handbook ¶ 3-6. HUD rejected the remaining 58.9% ofthe applications in that period.

The second period, February 1979 through July 1981, was one ofrelatively higher acceptances and referrals during which HUDaccepted 24.7% of the total applications it received and referred22.2% of the applications back to mortgagees. Some 53% of thetotal were rejected.

In the third and final period, however, beginning on August 1,1981, the number of acceptances as well as the combined number ofacceptances and referrals back to the mortgagees decreased belowthe level of either of the two prior periods. Through July 1982,the level of acceptances was 14.4%; that of referrals tomortgagees was 25.2%; and 60.4% of applications to the assignmentprogram were rejected.6

It was undisputed at the hearing that the precipitous declinein the level of mortgage assignments was no accident. Thedefendants' own expert testified that the likelihood of the drophaving occurred merely by chance was on the order of one in onedecillion. (Tr. 335) Plaintiffs argue that, because somenon-random factor has caused HUD's mortgage assignment rate toslip dramatically below even the level prior to the AmendedStipulation, the defendants, in order to avoid contempt citation,shouldbe required to show that the lower rate is not the result oftheir violation of the Stipulation.

That theory of statistical burden shifting is premised onseveral of the Supreme Court's discrimination cases, which, theplaintiffs argue, are authority for the proposition that thestatistical disparity between the third and the earlier twoperiods establishes a "prima facie case" that HUD violated theAmended Stipulation, shifting the burden to HUD to articulate orshow a permissible basis for the drop. See generallyInternational Brotherhood of Teamsters v. United States,431 U.S. 324, 334-43, 97 S.Ct. 1843, 1854-59, 52 L.Ed.2d 396 (1977);Hazelwood School District v. United States, 433 U.S. 299, 306-13,97 S.Ct. 2736, 2740-44, 53 L.Ed.2d 768 (1977); Castaneda v.Partida, 430 U.S. 482, 486-97, 97 S.Ct. 1272, 1275-82, 51 L.Ed.2d498 (1977).

The applicability of these cases to this motion for civilcontempt is problematic. We may not hold HUD in contempt of ourNovember 1979 order absent proof by clear and convincing evidencethat HUD violated a valid and unambiguous requirement of theAmended Stipulation or the Handbook. See, e.g., Shakman v.Democratic Organization of Cook County, 533 F.2d 344, 351 (7thCir.), cert. denied, 429 U.S. 858, 97 S.Ct. 156, 50 L.Ed.2d 135(1976); Vertex Distributing Inc. v. Falcon Foam Plastics, Inc.,689 F.2d 885, 892 (9th Cir. 1982); United States v. GreyhoundCorp., 363 F. Supp. 525, 570 (N.D.Ill. 1973), aff'd, 508 F.2d 529(7th Cir. 1974). And there is substantial question in our mindwhether this standard can be satisfied solely by the level ofstatistical proof that the plaintiffs have introduced here.

Equal Employment Opportunity Commission v. Plumbers' Union No.38, 28 Fair Empl.Prac.Cas. (BNA) 1567 (N.D.Cal. 1981), remanded,676 F.2d 709 (9th Cir. 1982), to which the plaintiffs havedirected our attention, involved proof relating to a consentdecree in an employment discrimination case that requiredindenture of a set quota of minority apprenticeship applicants.Plumbers' Local is therefore not authority for the propriety ofinferring from the statistical proof that the AmendedStipulation, which set no quotas or acceptance requirements, wasviolated. See also Aspira of New York, Inc. v. Board of Educationof the City of New York, 423 F. Supp. 647, 651 (S.D.N.Y. 1976)(failure to meet goals set by consent decree not grounds forholding defendants in contempt absent specific evidence ofdefendants' indifference to the decree) (dicta).

At the hearing, the plaintiffs sought to correlate the abruptdecline in the level of acceptances to an August 1981 HUDdecision to tighten up on application of the assignmenteligibility criteria. They introduced a memorandum or telegramfrom HUD's Washington, D.C. office to its field office personnel,dated August 5, 1981 — a date that roughly coincides with thebeginning of the plaintiffs' third period — which lamented thehigh number of defaults and foreclosures of HUD-assignedmortgages. That memorandum stated that "[t]he high default andforeclosure rate leads to a conclusion that the local officeshave misinterpreted and/or misapplied the assignment eligibilitycriteria in a great many cases." And the memorandum went on toinstruct Field Office personnel to use income before defaultrather than at the time of application to measure eligibility forassistance; to require positive evidence of ability to satisfythe reasonable prospect of ability to pay criterion; and, ingeneral, to place the burden "on the mortgagor to establish thateach of the [eligibility] criteria has been met rather than onthe Field Office to establish that it has not been." Theseprocedures, the memorandum stated, represented no change inpolicy from that announced in the Handbook and incorporated inthe Amended Stipulation in this case.

Even assuming that the August 5, 1981 memorandum was the directcause of the decline in the percentage level of assignments,7that memorandum is not direct evidencethat HUD has violated the terms of the Amended Stipulationor of the Handbook. It is clear that beginning at least as earlyas August 1981, HUD wished to limit access to the assignmentprogram. To that end, the Department decided to reverse thepresumption of eligibility for the program and to require strictproof of eligibility. But the plaintiffs have not demonstrated oreven suggested that HUD's actions in this regard violated clearand unambiguous directives in the Amended Stipulation or theHandbook.

The plaintiffs suggest that we should infer wrongdoing from thefact that the percentage level of mortgages assigned to HUDduring the third period, 14.4%, is actually lower than theinitial period level of 18%. In the initial period, there wasconcededly a "significant incidence of error in theadministration of the program." Amended Stipulation at p. 2. Andfor the assistance level now to have decreased below that of theinitial period in this subsequent period of record levels ofunemployment and other economic hardship beyond many mortgagors'control, is exactly the reverse of what we would have expected.

However, as the defendants properly emphasize, the AmendedStipulation does not require and the plaintiffs have notdemonstrated that there is a "normal" level of acceptance ofmortgage assignments that is associated with HUD's compliancewith the consent decree. It is readily apparent that HUD isaccomplishing far less than the terms of the Handbook and theAmended Stipulation would allow it to or than we believed wouldbe accomplished. It is lamentable from our point of view, and nodoubt acutely painful to rejected mortgagors who have lost theirhomes as a result, that HUD has chosen not to pursue the fullextent of relief that is permissible under the Handbook and theAmended Stipulation. Once again, HUD has violated the spirit, ifnot the letter, of its representations to and agreements with theplaintiff class and the Court.

Our surprise and disappointment at the statistical developmentsand HUD's performance or lack thereof may not, however, form thebasis for a finding that HUD failed properly to apply theeligibility criteria in the absence of proof that any specificprovision of the Handbook was violated. We conclude, therefore,that HUD may not be held in contempt by virtue of the unfortunatedecline in its mortgage assignments. This is not to suggest,however, that a further reduction in the number of assignmentsaccepted may not require a showing by HUD that such a reductionwas not the result of contemptuous conduct.

The plaintiffs' second and apparently unrelated8 ground forholding HUD in contempt, which is directed to the level ofassistance provided to those mortgagors who are accepted into theprogram, also gives us pause. The plaintiffs argue that theHandbook requires HUD to limit the mortgage payments that itrequires on mortgages that have been assigned to it to a levelsuch that not more than 35% of the mortgagors' net effectiveincome during the course of their payment programs is allocatedto housing expense. This so-called "35% rule" is certainly asensible one in light of the purpose of the assignment program toprovide temporary relief from onerous mortgage payments, and, aswe stated at the hearing (Tr. 365), it had been our understandingat the time we approved the Amended Stipulation that the rulewould apply to all payment plans. The plaintiffs apparently hadthat understanding as well. (Tr. 368)

Chapter 5 of the Handbook, which sets out the required policywith respect to formulationof repayment plans, does not, however, appear to require aceiling of 35% of net effective income in all cases. In a firstparagraph, 5-1, labeled "General," chapter 5 provides in part:

When developing payment plans, the Field Office must strike a balance between the current financial ability of the borrower and the need to pay the mortgage in full. If a mortgagor cannot immediately resume payments in the amount that will enable him/her to pay the mortgage in full by the maturity date, the Field Office may initially reduce or suspend payments for up to 18 months and may extend the maturity date of the mortgage by up to 10 years so as to reduce the monthly payment that would be required to pay the mortgage in full. A payment plan may be extended beyond 18 months only under unusual circumstances.

Paragraph 5-4 then describes how to arrive at the "PaymentAmount"; in part, it provides:

The Loan Specialist should develop a payment plan that, given the financial ability of the mortgagor, will enable the mortgagor to clear the delinquency as soon as possible and pay the mortgage in full. The Field Office is given broad discretion to tailor the payment program to individual needs. In addition, when the mortgagor is able to resume full monthly payments the Field Office may recast the mortgage and extend the term by up to ten years so as to reduce the monthly payment to an affordable amount.

a. During the period of reduced or suspended payments, the monthly payment demanded by the Field Office shall not cause the mortgagor's total housing expense to exceed 35 percent of net effective income. . . .

b. After a period of reduced or suspended payments or in order to cure a default under an existing payment program, the Field Office should develop a repayment program that will enable the mortgagor to reinstate the mortgage and pay the mortgage in full by its maturity date, or a date not more than 10 years after the maturity date. If the monthly payment required to pay the mortgage in full by the present maturity date plus 10 years . . . is less than or equal to 35 percent of the mortgagor's net effective income less other housing expense . . . a period of reduced or suspended payments may not be needed.

These provisions are full of discretionary language. Paragraph5-1, for example, does not require a period of reduced orsuspended payments in every case. By the terms of paragraph5-4(a), the 35% rule applies only in those cases where HUD haspreviously determined, in its discretion, that the mortgagorshould be allowed a period of reduced or suspended payments andthen only for the duration of that period of reduced or suspendedpayments. Although subparagraph 5-4(b) implies that somethinglike a 35% rule will be applied to determine whether a period ofreduced or suspended payments is to be allowed in a particularcase, the language of that subparagraph as well is entirelydiscretionary.

The plaintiffs argue that it is to be expected that a mortgageassignment program whose avowed purpose is "to give financiallydistressed mortgagors an opportunity to avoid foreclosure andretain their homes," Handbook ¶ 1-1, would provide a period ofreduced or suspended payments in every one — or all but a few —of the cases accepted for assignment. Plaintiffs thereforeconclude that the 35% rule contained in Handbook ¶ 5-4 shouldapply in virtually every case. These suppositions — and that isessentially all they are — appear logical to us as well.

In practice, however, HUD's monthly statistical reports and theuncontroverted testimony at the hearing (Tr. 222-25) reveal thatover 50% of the payment plans call for payments at the originalnote rate or higher. It was also conceded that a substantialnumber of the mortgagors accepted by HUD for assistance are neverallowed a temporary period of reduced or suspended mortgagepayments. (Tr. 453) HUD maintains that in those cases, thecircumstances that led to default had already been curedby the time HUD accepted assignment of the mortgage. By the clearterms of the Handbook, mortgagors who are deemed not in need ofa period of reduced or suspended payments are not entitled tospecific consideration of their available income in HUD'sdetermination of their payment plan.

It seems obvious that a mortgage payment plan which requiresallocation of over 35% of the mortgagor's net effective income tohousing expense is one that is likely to end in default andforeclosure. We are astonished at HUD's apparent policy routinelyto permit or require such payment plans to go into operation. Andwe are not at all surprised to learn, in light of that apparentpolicy, that by HUD's own reckoning — as expressed both in theAugust 5 memorandum and at the hearing — the rate of defaults andforeclosures of HUD assigned mortgages has been inappropriatelyand unfortunately high. (Tr. 423-26)

HUD's cavalier and taciturn response — that "nothing requires"it to apply the 35% rule to all payment plans — surprises us inlight of HUD's prior representations to us and its undeniableobligation to operate its foreclosure avoidance program so as tofulfill a National Housing Act policy of providing a decent homeand suitable living environment for every American family. See42 U.S.C. § 1441. That statutory obligation was imposed by theCongress and confirmed by us in an earlier opinion in this case,Brown v. Lynn, supra, and the obligation is now no longer open toquestion. See United States v. Winthrop Towers, 628 F.2d 1028,1032 (7th Cir. 1980). In light of that obligation, we would haveexpected that HUD would, at a minimum, provide some justificationfor its apparent conclusion that requiring mortgagors to allocatein excess of 35% of net effective income to housing expense infact advances that national housing policy.

Although we are dismayed at HUD's obvious lack of enthusiasmfor achievement of the national housing goals as established bythe Congress, we are able to discern in the Handbook only theclear requirement — with which HUD asserts it has complied — thatthe 35% rule be applied only during the period of reduced andsuspended payments allowed for certain eligible mortgagors. Wetherefore cannot find HUD in civil contempt for having apparentlylimited its application of that rule. We reach that conclusionwith considerable regret, because we believe the 35% rule is asound one in all cases and we were previously led to believe thatHUD agreed. The rule appears entirely consistent with the broadnational housing policy to which we have referred above as wellas with the purposes of the Amended Stipulation and we would havehoped that HUD would have applied it to all repayment plans.However, our views on the compatibility of the 35% rule withthese goals and purposes are no basis for a finding of contemptunder the Amended Stipulation. Cf. Hughes v. United States,342 U.S. 353, 72 S.Ct. 306, 96 L.Ed. 394 (1952). Again, however, HUDhas demonstrated that it will resolve any ambiguity so as torestrict or limit the relief it affords a mortgagor and makedefault and foreclosure more likely.

Modification of the Amended Stipulation to Permit Implementation of the Proposed TMAP Regulations

We turn now to HUD's motion to modify the Amended Stipulationto allow implementation of the proposed TMAP regulations — and tothe prospects for future provision of mortgage foreclosureavoidance relief.

As quoted above, the Amended Stipulation now requires, inparagraph 3, the operation through August 1984 of a mortgageassignment program in accordance with the "binding instructions"contained in the Handbook. Any modifications in the program mustpreserve the "basic rights" accorded mortgagors under theHandbook now in effect. Furthermore, HUD is obliged by paragraph14 of that Amended Stipulation, even after the termination of itsspecific obligations, to provide foreclosure avoidance relief formortgagors in temporary financial distress that is consistentwith HUD's obligations as construed under the National HousingAct, as amended, Section 2 of the Housing Act of 1949and Section 2 of the Housing and Urban Development Act of 1968.Paragraph 14 further provides: "the Department shall provideassistance or relief in the form of the present assignmentprogram or an equivalent substitute to permit mortgagors indefault on their mortgages to avoid foreclosure and to retaintheir homes during periods of temporary financial distress."[Emphasis added.]

Our previous discussion of the 1980 amendments makes clear thatthe statutory underpinning of the Amended Stipulation isfundamentally unchanged. In essence, the effect of the amendmentsis to permit HUD to use alternative means for providingequivalent foreclosure avoidance assistance. HUD may now assistmortgagors in temporary financial distress by providing TMAP aswell as — in those cases where TMAP is "inappropriate" — byacquiring the mortgage and forbearing to collect full orimmediate payments. It is clear that, while HUD soughtlegislation under which it could have made TMAP the soleforeclosure avoidance procedure, the intention and effect of the1980 amendments as enacted was to leave unaltered theavailability and quality of existing mortgage foreclosureavoidance assistance.

Further, we have no difficulty in concluding that the effect ofthose provisions of the Amended Stipulation that we have set outabove is also to require that the TMAP program be implemented ina manner which will provide foreclosure avoidance relief asnearly equivalent to that available under the assignment programas is consistent with the amended statute. We are bound toconstrue the Amended Stipulation not with narrow, mechanicalreference to its letter alone, but in light of its spirit andpurposes. See White v. Roughton, 689 F.2d 118, 119-20 (7th Cir.1982). And the undeniable purpose of paragraphs 3 and 14 of theAmended Stipulation — though neither paragraph explicitlyaddresses the unanticipated and undisclosed contingency of apossible amendment of section 230 within the five-year period forwhich the Handbook is binding — is to require, so long asprovided for by statute, mortgage foreclosure avoidanceassistance of at least as high a quality as that provided for inthe Handbook. In paragraph 14 the defendants promised — evenafter August 2, 1984 — to provide foreclosure avoidance relief atleast equivalent to the Handbook's assignment program, a promiseor obligation which the 1980 amendments can only be said to haveratified and underscored.

It follows from this that the defendants' proposed modificationto the Amended Stipulation, which would permit them to operatethe TMAP program without reference to HUD's obligations under theAmended Stipulation as agreed to and approved in 1979 and to befree of judicial oversight, is unacceptable. System FederationNo. 91, Railway Employees' Department, AFL-CIO v. Wright,364 U.S. 642, 81 S.Ct. 368, 5 L.Ed.2d 349 (1961), and State ofPennsylvania v. Wheeling & Belmont Bridge Co., 59 U.S. (18 How.)421, 15 L.Ed. 435 (1856), on which the defendants rely, do notmandate a different result. While a change or development in thelaw underlying the Amended Stipulation would oblige us to makeconforming modifications in that Stipulation, it is clear thatthere has been no such change.

Far from discerning any "necessary implication" in the 1980amendments or their legislative history that the AmendedStipulation should not govern the operation of TMAP, we aresatisfied that Congress wished the provision of mortgageforeclosure avoidance relief to continue unaltered and did notintend the amendments to supersede the Amended Stipulation'srequirement that HUD continue to provide relief "equivalent" tothe mortgage assignment program. In light of HUD's priorperformance, Congress wisely did not give HUD discretion tosubstitute TMAP for its obligations under the AmendedStipulation. Under these circumstances, there is no basis formodifying the Amended Stipulation so as to permit HUD to operateTMAP without reference to its obligations under the AmendedStipulation. See Environmental Defense Fund, Inc. v. Costle,636 F.2d 1229, 1241 (D.C.Cir. 1980).

Nor do we accept the plaintiffs' argument that the AmendedStipulation prohibits implementation of any TMAP program. Theplaintiffs appear to rely on paragraph 3 of the Stipulation whichprovides in part that the Handbook "shall constitute bindinginstructions for implementation of the assignment program" andthat HUD "shall administer the assignment program substantiallyin accordance with the terms of [the] Handbook." Plaintiffs alsopoint to those portions of section 230 that undeniably grant HUDdiscretion to continue operation of the assignment program.

If there is any basis in the language of the AmendedStipulation for concluding that it requires that the assignmentprogram be the sole or exclusive form of mortgage foreclosureavoidance relief, a conclusion with which we do not agree, thenthe 1980 amendments to section 230 would contravene and supersedesuch a limitation. The amendments to section 230 accord HUDpermission to operate a TMAP program as well as an assignmentprogram so long as there is no reduction in the availability andquality of mortgage foreclosure avoidance assistance. Given thislegislative grant of permission, we may not now refuse to allowimplementation of a TMAP program in a fashion consistent with theunaltered purposes of the statute and the Amended Stipulation.See System Federation No. 91, supra, 364 U.S. at 646-48, 81 S.Ct.at 370-72.

With these principles in mind, we turn to the regulations thatHUD has proposed and now seeks to implement.9 As is apparent fromthe foregoing, our analysis must determine whether the proposedregulations protect the basic rights secured to eligiblemortgagors by HUD's former commitment to operate its mortgageforeclosure avoidance program in accordance with the Handbook.Simply stated, if the proposed regulations do not preserve theavailability and quality of foreclosure avoidance assistance nowprovided for under the Handbook to the maximum extent that suchpreservation is permissible under amended section 230, then theyare inconsistent with the Amended Stipulation and may not beimplemented.

We emphasize that the plaintiffs have not suggested, and theissue before us is not merely whether, the HUD-proposedregulations are inconsistent with section 230 as amended andinvalid for that reason alone. If that were the only issue beforeus, we would agree with HUD's position that appropriate deferenceshould be accorded to HUD's interpretation and construction ofthe statute which it is charged with administering and we wouldnot hesitate to uphold the regulations if they were consistentwith a fair, non-arbitrary reading of the rule-making authorityvested in HUD by section 230. See Federal CommunicationsCommission v. Schreiber, 381 U.S. 279, 288-94, 85 S.Ct. 1459,1466-70, 14 L.Ed.2d 383 (1965); McElrath v. Califano,615 F.2d 434, 439 (7th Cir. 1980). But in this case, HUD is required to domore than merely promulgate regulations that are consistent withthe statute. Except insofar as the statute clearly contemplatesthe contrary, HUD must also achieve its obligations under theAmended Stipulation, to which it obviously still remains subject.With respect, in light of the foregoing, HUD's substantialfailure to address in its briefs the effect of certain of theproposed regulations on its obligations under the AmendedStipulation is an anomalous or even ominous omission.

The plaintiffs argue that there are numerous features of theproposed regulations that will unnecessarily render the terms offoreclosure avoidance assistance more onerous for mortgagors orrestrict the availability of such assistance. Three ofplaintiffs' objections relate to the proposed provisions for theinterest rate, date of interest accrual and repayment ofassistance with respect to the TMAP and mortgage assignmentprograms. The proposed TMAP regulation would read:

(a) Upon termination of TMAP, all TMAP made by the Secretary, together with interest accrued thereon from the dates of TMAP made by the Secretary at the maximum interest rate allowed under § 203.20 at the time the Secretary determines that the mortgagor is eligible for TMAP shall be immediately due and payable unless, pursuant to paragraph (b) below, the Secretary enters into one or more forbearance agreements.

(b) After termination of TMAP, the Secretary may enter into one or more forbearance agreements to postpone repayment of all or part of the TMAP, providing for monthly payments by the mortgagor:

(1) In an amount as the Secretary determines upon an examination of the mortgagor's financial condition and circumstances, and the mortgagor's ability to contribute to the mortgage payments.

(2) In such other amount or amounts as may be prescribed by regulation at the time of execution of any forbearance agreement.

24 C.F.R. § 203.644 [proposed].

And the proposed mortgage assignment regulation provides:

(a) Upon termination of the period of forbearance assistance the mortgagor shall repay to the Secretary all amounts forborne with interest thereon accrued and payable in accordance with the terms of the mortgage instrument.

(b) The mortgagor shall pay to the Secretary each month until the payments on the mortgage are current an amount based upon an examination of the mortgagor's financial condition and circumstances, and the mortgagor's ability to contribute to the mortgage payments. However, the repayment amount may not be less than the mortgagor's total payment to principal, interest, taxes, hazard insurance, mortgage insurance premiums, assessments, and ground rents.

24 C.F.R. § 203.649 [proposed].

Plaintiffs argue first that the rate of interest charged onTMAP — which under § 203.644(a) is the maximum allowed FHA rate,13.5% at the time of the hearing — is likely to be greater thanthe interest currently charged on the "amount forborne" under theHandbook assignment program, which, by HUD's account, is the sameinterest rate as that on the mortgage itself. See Handbook,Appendix 29. (Tr. 458) Plaintiffs contend that, particularly withrespect to older mortgages, the mortgage note rate will be lowerthan the current FHA maximum. The effect of this, the plaintiffsargue, is to restrict availability of mortgage foreclosureavoidance assistance.

At the hearing, the plaintiffs introduced expert testimony thatan increased interest rate would result in substantiallyincreased payments during the repayment period. (Tr. 110-16) Theeffect of the higher payments, it was charged, is to diminish thelikelihood or "reasonable prospect" that a mortgagor will be ableto make full repayment and, therefore, to adversely affecteligibility for the program. (Tr. 116-17) In addition, it wouldbe likely to produce a higher rate of future defaults andforeclosures.

HUD counters that, because of currently declining interestrates, the mortgage note interest rate may often in fact behigher than the FHA maximum with the result that the proposedTMAP regulations actually will work a benefit to mortgagors inmany cases. HUD also presented expert testimony at the hearingand HUD's expert emphasized that most mortgage defaults occurduring the first two years in the life of the mortgage. (Tr. 459)Because of the combination of currently declining interest ratesand unusually high interest levels over the past two years, theexpert suggested that most HUD-assisted mortgagors will bebenefited by the proposed TMAP interest formula. Theseconclusions were, in turn, challenged by plaintiffs' expert whoreasoned that the current unusually severe economic conditionsmay actually result in a higher than normal incidence of defaulton relatively elderly mortgages with interest rates well belowthe current FHA maximum. (Tr. 185-86)

We obviously cannot determine — either for current conditionsand trends or for thefuture — whether the note rate or the FHA maximum rate would bemore beneficial to the greater number of mortgagors. Our concernis only that mortgagors assisted under the new statutory schemereceive an interest rate on assistance that is as low as the onerequired by the Amended Stipulation and at least as low as thestatutory maximum.

It is clear that, with the enactment of the 1980 amendments tosection 230, the interest rate charged on any form of assistancemay never exceed the current FHA maximum. See section 230(a)(5)and (b)(2). The HUD-proposed maximum FHA interest rate is notrequired by the amended statute; HUD has merely chosen in theTMAP regulations to adopt the maximum interest rate that amendedsection 230 will permit. What is more, the current Handbookpractice is to charge an interest rate that would be lower thanthe FHA maximum in those cases where the mortgage note rate is infact lower than the current FHA rate.

It follows, and we conclude, that the combined — and consistent— effect of the amendments to section 230 and the AmendedStipulation is to prohibit HUD from charging interest onassistance greater than the lower of the mortgage note rate orthe current FHA maximum allowable interest rate. Only if HUD isrequired to adhere to that rule will mortgagors have the benefitof both the statutory ceiling on the allowable interest rate andthe full relief available under the Handbook. Because theproposed regulations do not require HUD to charge the mortgagenote rate on TMAP assistance when that is lower than the currentFHA maximum, they fail to preserve basic rights available underthe Amended Stipulation.

HUD suggests, however, that under the proposed regulations ithas, in effect, discretion to charge the mortgage note interestrate in cases where that is lower. Specifically, HUD appears tosuggest that, because the proposed regulations for mortgageassignments in § 203.649(a) call for interest equal to themortgage note rate, HUD may simply exercise its discretion todetermine that TMAP is "inappropriate" in a case where the noterate is lower than the FHA maximum, and accept a mortgageassignment instead, thereby precluding any variation between theterms of the proposed TMAP program and the Handbook's assignmentprogram.

While this is possible, we are not confident that HUD will infact exercise its discretion to accept a mortgage assignmentunder these circumstances. The provision of the proposedregulations concerning an administrative finding that TMAP is"inappropriate" makes no reference to a disparity in interestrates or to the relative difficulty of obtaining assistance underthe regulations and statutory provisions relating to the TMAP andassignment programs, respectively. The proposed regulations onlyprovide that TMAP is "inappropriate" (1) where the mortgageerefuses to accept TMAP on behalf of an eligible mortgagor (2)where the mortgagee is unwilling to extend the mortgage term andextension is necessary for the mortgagor to afford repayment and(3) where, for reasons beyond his control, the mortgagor isunable to execute the necessary TMAP documents. The proposedregulation on inappropriateness would provide:

(a) The Secretary will accept an assignment of a mortgage which meets the conditions of § 203.640(a)(1) through (6) if determined by the Secretary to be necessary to avoid foreclosure and if the Secretary determines that TMAP would be inappropriate in the case of the mortgagor. In applying § 203.640(a)(4) the term "assistance" is deemed to refer to forbearance assistance pursuant to § 203.646. Among other grounds, TMAP shall be determined to be inappropriate if the mortgagee refuses to accept TMAP or if extension of the mortgage maturity (by not more than 10 years after the original maturity) would be necessary in order for the mortgagor to afford repayment and the mortgagee is unwilling to do so. If a mortgage is found ineligible for TMAP due to the mortgagor being unable to execute the documents required by the Secretary to assure repayment of the TMAP (§ 203.640(b)(7)), an assignment will be accepted where the inability is caused by circumstances beyond the mortgagor's control.

(b) A mortgage shall not be eligible for assignment in any case where:

(1) The mortgaged property has been abandoned, or has been vacant for more than 60 days, or

(2) The mortgagor, after being clearly advised of the options available for relief, has clearly stated in writing that he/she has no intention of fulfilling his/her obligation under the mortgage, or

(3) The mortgagee is prevented by law from initiating foreclosure of the mortgage, or

(4) The mortgagor owns two or more properties occupied by tenants who are paying rent, and the rental income is not being applied to the mortgage under review, or

(5) TMAP have been paid on behalf of the mortgagor within twelve months of the date of the assignment request to the Secretary, except that the Secretary may accept assignment of a mortgage with respect to which TMAP were made immediately prior to the assignment for the sole purpose of extending the term of repayment under the mortgage so that the mortgagor will be able to make the full payments on the mortgage; or

(6) The property is owned by a partnership or corporation, or

(7) TMAP were not provided because the mortgagor was unwilling to execute the documents required by the Secretary to assure repayment of the TMAP.

24 C.F.R. § 203.645 [proposed].

What is more, HUD's performance under the Amended Stipulationto date gives us reason to be skeptical of its current assurancesthat it will exercise "discretion" to find TMAP inappropriate ina fashion that will facilitate foreclosure avoidance assistanceequivalent to the Handbook. Under the Amended Stipulation, HUDhas consistently, it appears, exercised its discretion inprecisely the opposite direction — to limit access to theassignment program and to limit the level of assistance provided.

Moreover, since HUD has made it clear that it intends toutilize TMAP wherever possible so as to reduce its currentexpenditures and would have endeavored to replace acceptance ofmortgage assignments entirely with TMAP if Congress hadauthorized it to do so, it seems unlikely, if not inconceivable,that HUD would find TMAP inappropriate solely on the ground thatit desired to give a mortgagor the benefit of a lower interestrate. We therefore have no reason to rely on HUD's assurancesthat it will exercise its discretion in a manner that willmaximize — not minimize — access to assistance under itsforeclosure avoidance relief operations. On the contrary, givenHUD's consistent practice of resolving all doubts as to itsobligations against a mortgagor, we must assume that anydiscretion given HUD or any ambiguity in the TMAP regulationswill be similarly utilized.

Nor are we moved by HUD's assurances that it will exercise itsdiscretion under proposed § 203.644(b) to enter into forbearanceagreements with the effect — it is implied — of eliminating theadverse affect on eligibility of possibly higher interest chargesby allowing mortgagors to repay TMAP assistance after themortgage is retired. HUD has nearly absolute discretion underproposed § 203.644(b) with respect to forbearance agreements andthere is no indication in the record of this case or requirementin the regulations themselves that HUD will exercise thatdiscretion in the manner suggested. The proposed regulations donot clearly provide that mortgage foreclosure avoidanceassistance shall be subject to an interest rate no higher thanthat currently charged on assistance provided under the Handbook.Those regulations therefore denigrate "basic rights" under theHandbook, do not provide for an "equivalent" form of foreclosureavoidance assistance, and may not, consistent with the AmendedStipulation, be implemented.

The plaintiffs' second attack on the above-quoted provisions ofthe proposed regulations concerns their alleged inconsistencywith the current Handbook procedure of not charging interest onthe amount of forbearance until after the period of reduced orsuspended payments. See Handbook, Appendix 6. The proposedregulations provide that interest will begin toaccrue on the amount of assistance payments or forbearance as ofthe dates thereof. HUD does not suggest that the plaintiffs havemisstated the practice of forgiveness of interest under thecurrent Handbook or misconstrued the intent and effect of theproposed regulations.

The imposition of an additional interest obligation on assistedmortgagors — one that is not required and, in all probability,not contemplated by the amendments to section 230, see Section230(a)(5) and (b)(2) — results in a more onerous payment burdenfor those assisted, more probability of future default andforeclosure, and may also limit eligibility for assistancebecause higher repayment obligations may preclude certainmortgagors from satisfying the "reasonable prospect" criterion.Therefore, insofar as §§ 203.633 and 203.649 require interest onassistance to accrue from the date of the assistance, thosesections of the proposed regulations do not preserve basic rightsunder the Amended Stipulation and may not be implemented.

Third, the plaintiffs contend that the proposed regulations areinconsistent with the Handbook because they require, with respectto TMAP, that the full TMAP assistance is due and payableimmediately after TMAP assistance is terminated, § 203.644(a),and, with respect to mortgage assignment, that the "foreborneamount" is due after the termination of mortgage assistance in anamount determined by HUD, § 203.649.

Under the current Handbook ¶ 5-4(b), as implemented by Appendix6, HUD is required to develop a repayment program that will allowan assisted mortgagor to retire the mortgage by the originalmaturity date extended, if necessary, by up to 10 years. Inpractice, the HUD Payment Plan Worksheet, Appendix 6, allows foronly two methods for structuring repayment. And under each ofthem, the repayment of assistance is prorated or amortized overthe life of the mortgage, which may be extended, in HUD'sdiscretion, by up to 10 years. Section 230 as amended, seeSection 230(a)(5) and (b)(2), grants the Secretary broaddiscretion in structuring repayment plans under both the TMAP andthe assignment programs; continuation of the present practice ofprorating repayment of assistance over an extended mortgage termis not inconsistent with the amended statute.

It is, of course, correct that under the proposed regulationsHUD is to examine the mortgagor's financial circumstances andability to contribute to the mortgage payments in determining howto structure repayment of the forborne amount under the proposedassignment program or whether to enter a forbearance agreementunder the TMAP program. There is nothing in the proposedregulations to circumscribe HUD's discretion with respect to thisexamination, however. And there is therefore nothing to preventHUD from requiring repayment on terms even more onerous thanproration over the original term of the mortgage which is themost severe repayment schedule, following a period offorbearance, which HUD may now require under the Handbook ¶5-4(b) and Appendix 6.

As we have said before — and it is an observation that deservesemphasis — we have ample reason to believe, in light of pastperformance, that, given discretion to require assistancerepayment terms more onerous than under the Handbook, HUD will,in many instances, do so. Thus, because the proposed regulationsgive HUD virtually unfettered discretion with respect to thetiming and amount of required assistance repayments, the proposedregulations are inconsistent with the Amended Stipulation and maynot be implemented.

The plaintiffs have also drawn our attention to the sections ofthe proposed regulations that concern the level of assistanceprovided under TMAP and the proposed assignment programrespectively. They provide:

Monthly TMAP on behalf of a mortgagor may be in an amount as the Secretary determines based upon an examination of the mortgagor's financial condition and circumstances, and the mortgagor's ability to contribute to the mortgage payments. However, monthly TMAP may not exceed the mortgagor's total payment to principal, interest, taxes, hazard insurance, mortgage insurance premiums, assessments and ground rents.

24 C.F.R. § 203.641(a) [proposed].

The Secretary will provide assistance to a mortgagor whose mortgage has been assigned under § 203.645, through forbearance, in an amount based upon an examination of the mortgagor's financial condition and circumstances, and the mortgagor's ability to contribute to the mortgage payments. However, the forbearance amount may not exceed the mortgagor's total payment to principal, interest, taxes, hazard insurance, mortgage insurance premiums, assessments and ground rents.

24 C.F.R. § 203.646 [proposed].

We have previously considered at some length the level ofassistance currently available under the Handbook. And weconcluded that, while the intent of the Handbook is notaltogether clear, the so-called 35% rule — reflecting the maximumpayment a mortgagor could be required to make and, therefore, thelevel of assistance — clearly applied only during the period ofreduced or suspended payments allowed for those mortgagors luckyenough to have been found entitled to such a period.

A cursory glance at the proposed sections of the regulationsquoted above reveals that HUD now proposes to jettison the 35%rule altogether and not to be bound by it even during the actualforbearance or assistance period as Handbook ¶ 5-4(a) now clearlyrequires. There is nothing in the amendments to section 230 tosuggest that this result is required or even contemplated. Whilewe noted above that HUD's limited application of the 35% ruleresults in more defaults and foreclosures than we had expected orhoped would occur under the Amended Stipulation program, ithardly follows that we — or the affected mortgagors — would bejust as content to have the 35% rule disappear altogether. Thefailure to provide even a limited 35% rule, consistent with theclear requirement of Handbook ¶ 5-4(a), can only further increasethe incidence of default and foreclosure. And that failure alsorenders the proposed regulations inconsistent with the AmendedStipulation and constitutes an additional reason why they may notbe implemented.

The plaintiffs raise three inconsistencies of the proposedregulations with provisions of the regulations under which theassignment program currently operates. These current regulationsare, of course, part and parcel of the "present assignmentprogram" that HUD is required at least to equal in any futureforeclosure avoidance programs that it may operate, see AmendedStipulation ¶ 14, and HUD may not modify these regulations unlessthe modification preserves the current quality and availabilityof assistance. We therefore turn to the plaintiffs' argumentsthat the proposed regulations, in certain respects, reduce theavailability and level of foreclosure avoidance assistanceprovided for by the current regulations.

As described earlier, amended section 230(a)(1) codifies theHandbook rule, Handbook ¶ 2-1(d), that only mortgagors who havedefaulted due to circumstances beyond their control are eligiblefor assistance. The plaintiffs also object to the proposedformula for determining "date of default" for purposes ofapplying this eligibility criterion. Under the current assignmentprogram, pursuant to 24 C.F.R. § 203.330, the date of default isdetermined as follows:

A mortgage account is delinquent any time a payment is due and not paid. If the mortgagor fails to make any payment, or to perform any other obligation under the mortgage, and such failure continues for a period of 30 days, the mortgage shall be considered in default for the purposes of this part.

The plaintiffs suggest — and HUD in its response does not disputethe point — that the effect of the current Handbook wording is toallow a mortgagor, in effect, to cure a default by making paymentof a delinquent amount after the month in which payment is due.The parties apparently agree that under the current regulation,a mortgagor who brought his account current by making his March1 payment on March 3, who thenmade the April 1 payment on May 2 and the May 1 payment on June2, but who thereafter made no payments, would be in default, forpurposes of the eligibility determination, on June 1.

The proposed regulations provide:

(a) The Secretary may make temporary mortgage assistance payments (TMAP) to the mortgagee on behalf of a mortgagor who owns the property, when the following conditions are met:

(3) The mortgagor's default has been caused by circumstances beyond the mortgagor's control which rendered the mortgagor temporarily unable to correct the delinquency within a reasonable time and to make full mortgage payments. For the purpose of evaluating this criterion, the date of default shall be 60 days following the first day of the most recent month in which the mortgagor made a payment(s) within the month due which brought the account current. Payments made by the mortgagor after the date of default which are insufficient to bring the account current will not change the date of default.

24 C.F.R. § 203.640(a)(3) [proposed].

The effect of the proposal, plaintiffs point out, is adverselyto affect the eligibility chances of mortgagors who have fallena payment behind on their mortgages and who, despite makingregular payments, have failed to become current. Plaintiffs raisethe case of a homeowner who makes his January 1 payment onJanuary 6, his February 1 payment on March 6, his March 1 paymenton April 10 and his April 1 payment on May 5 and no paymentsthereafter. The plaintiffs assume that the homeowner lost his jobon April 20. Under the current regulation, as interpreted by bothparties, May 1 would be the default date. Application of thedefault date formula in the proposed regulation, however, yieldsa March 1 default date. (March 1 is 60 days after January 1, thefirst day of the most recent month in which the mortgagor made apayment within the month due to bring the account current.) Thus,under the proposed regulations, the homeowner in the examplecould not use the April 20 loss of employment as a "circumstancebeyond his control" in order to qualify for assistance. Thedefault date, by definition, would now occur prior to the eventnotwithstanding the fact that the ultimate default may actuallyhave been caused by the April 20 job loss.

HUD's only argument in response is that the plaintiffs' exampledoes not demonstrate an inherent, universal disadvantage of theproposed regulations, since it only fortuitously places the jobloss at April 20 where the proposed regulations will, HUDconcedes, restrict eligibility. HUD poses a counter-hypotheticalin which the homeowner, who has the same payment history, loseshis job in February and then regains employment in April and then— in the HUD hypothetical — makes no further mortgage payments,an unlikely scenario. In this case, HUD argues, the currentregulations, which would place the default date at May 1, wouldactually be less advantageous than the proposed regulations,under which the March 1 default date is closer in time to the jobloss. Thus, HUD's argument continues, it is really a matter ofchance whether a mortgagor will be hurt or benefited by thechanged formula and there is therefore no basis for concludingthat the proposed regulations are inherently inferior.

HUD offers no explanation why it has jettisoned one defaultdate formula for another formula that — it would have us believe— can only have a random effect on eligibility. Even putting thatincongruity aside, however, HUD's hypothetical is an insufficientanswer to the concerns raised by the plaintiffs. Initially, itstrikes us as highly improbable that a homeowner who, having losthis job but having continued to make delinquent payments on hismortgage, would — shortly after regaining employment — ceasemaking payments altogether.

But more fundamentally, HUD's rejoinder misses the point ofplaintiffs' objection. The effect of the proposed regulation isto tie the date of default to a requirement that the mortgagepayment have been made in the month for which it is due.Therefore, whenever a mortgagor continues for more than twomonths to make delinquent payments later than the month for whichthe payments are due, the time frame for "circumstances leadingto default," is foreshortened by the proposed regulations. Anevent succeeding the default cannot logically be said to causethe default,10 and the clear effect of the proposed regulations,under these circumstances, is to limit the range of events thatmay be considered in determining the reason for a default. HUDcannot explain away the fact that its proposed regulations willexclude from assistance many mortgagors who have fallen behind intheir mortgage payments over a period and who thereafter becomeunable, through circumstances beyond their control, to continuemaking any payments.

The current regulation, as the parties agree, permits suchmortgagors to cure their defaults and still qualify forassistance when some subsequent emergency causes them to ceasemaking payments altogether. The current regulation plainlyaccords with the letter and spirit of the Amended Stipulation, asanother court has already emphatically held. Etheridge v.Beasley, 532 F. Supp. 266, 270-71 (N.D.Ga. 1981).11 It is alsoclear that the proposed regulations will adversely affect theeligibility of a definable class of mortgagors who would beeligible for assistance under the current regulation. Theproposed regulation is therefore an impermissible implementationof the general requirement of Section 230(a)(1) and (b)(1) thata default have been caused by circumstances beyond themortgagor's control.

The plaintiffs also point to a change in 24 C.F.R. § 203.606(b)that is contained in the proposed regulations. Section203.606(b)(3) now provides:

(b) If the mortgagee determines that any of the following conditions have been met, the mortgagee may initiate foreclosure without sending the assignment notices required by §§ 203.651 and 203.652.

(3) The mortgagor owns two or more properties occupied by tenants who are paying rent, and the rental income from the property under review is not being applied to the mortgage on that property. [Emphasis added.]

The proposed section 203.606(b)(3) would read:

(b) If the mortgagee determines that any of the following conditions have been met, the mortgagee may initiate foreclosure without sending the notices required by §§ 203.650 and 203.651 and without the delay in foreclosure required in paragraph (a) of this section:

(3) The mortgagor owns two or more properties occupied by tenants who are paying rent and the rental income is not being applied to the mortgage under review.

The proposed regulation thus automatically excludes fromeligibility a broader class of mortgagors than is automaticallyexcluded under the current regulation. Specifically, the proposedregulation would permit a mortgagee to foreclose without noticeand without delay any mortgage in default if the mortgagor ownstwo or more properties occupied by tenants and is not applyingthe rent from all the properties to the mortgage under revieweven though the rent may be being applied to mortgages on theproperties which generated it. The current regulation requiresapplication only of the rental income from the property underreview.

HUD has offered no explanation or defense of this apparentlyinexplicable expansion of the automatic exclusion. The statute asamended does not require or even authorize any automaticexclusions. And while it may be that the number of mortgagorsaffected by this unexplained change in the regulations will berelatively small, it is quite clear that the change will directlyand adversely affect their basic rights. We have no assurancethat HUD will construe proposed section 203.606(b)(3) as theequivalent of the current regulation. The language has clearlybeen changed and we can only assume that HUD will apply therevised version since it is less favorable to mortgagors.Therefore, the proposed regulation is inconsistent with theAmended Stipulation. It may not be implemented.

Finally, the plaintiffs have drawn our attention to section203.640(a)(5) of the proposed regulations relating to exclusionfrom assistance for mortgages on property not the principal placeof residence of the mortgagor:

(a) The Secretary may make temporary mortgage assistance payments (TMAP) to the mortgagee on behalf of a mortgagor who owns the property, when the following conditions are met:

(5) The property is the mortgagor's principal place of residence. This criterion may be waived by the Secretary if such waiver is determined to be in the best interests of the Department.

The current regulations include an additional clause:

(a) The Secretary will accept assignments of mortgages insured under this part in order to avoid foreclosure when the following conditions are met:

(3) The property is the mortgagor's principal place of residence. This criterion may be waived by the Secretary if the property has been leased or rented and the rental income has been applied to the mortgage delinquency or to effect repairs necessary to maintain the property in a safe and habitable condition or if such waiver is determined to be in the best interests of the Department. [Emphasis added.]

HUD has contended, and we agree, that the deletion in theproposed regulation curtails no basic rights of mortgagors underthe current program. The deleted language is plainlydiscretionary; it may not be read as vesting in mortgagors anyright to waiver of the condition. With respect to this particularsection, we therefore conclude that the proposed regulations arenot inconsistent with the current operation of the assignmentprogram though the wording, unfortunately, portends that HUDmight, in the future, choose to limit the cases in whichdiscretion will be exercised in favor of the mortgagor.

The provisions in the proposed regulations for review ofpayment plans are, however, inconsistent with the AmendedStipulation. Sections 203.643(c) and 203.648(c) of the proposedregulations would provide for mandatory review of payment plansonly in the case of a mortgagor whose gross income has decreasedby $50.00 or more per month. The Amended Stipulation, however, inparagraph 7, provides for mandatory review under a considerablywider range of circumstances:

7. HUD shall review and, as appropriate, restructure payment plans of assigned mortgages to ensure that they are reasonable and comport with24 C.F.R. § 203.650-662 and Handbook 4191.2 under the following circumstances:

(a) Before any action has been taken by reason of mortgagor default;

(b) When the terms of such a plan expire;

(c) When a plan is in default for three months or longer;

(d) When the terms of an existing plan extend more than six (6) months from the Order date;

(e) When a mortgagor so requests for good cause.

Under ordinary conditions, we might presume that no negativeinference was intended by the proposed regulation's failure tolist all of the circumstances which, under the AmendedStipulation, now trigger mandatory review of payment plans.However, the history of this lawsuit demonstrates that HUD is noordinary litigant. HUD is seeking leave to amend the AmendedStipulation to permit implementation of TMAP apparently totallywithout regard to the provisions of that stipulation; and in thiscontext, we can only assume that, by these sections of theproposed regulations, HUD intends to bypass or eliminate thereview procedures mandated by the Amended Stipulation.

It is quite clear, in any case, that the payment plan reviewprocedures contained in the Amended Stipulation are binding onHUD for the duration of the stipulation with respect not only tothe assignment program, but with respect to the new TMAP programas well. To the extent any regulations provide or imply thecontrary, they are, unless mandated by statute — as the proposedreview procedures in issue here manifestly are not, see Section230(a)(4) — in violation of the Amended Stipulation.

The proposed regulations also contain an omission which, theplaintiffs argue, unnecessarily renders the quality of theassistance provided under TMAP inferior to that available underboth the current and revised versions of the assignment program.The plaintiffs point to the fact that Section 230(a)(5) requiresthe Secretary to secure all TMAP that he has provided by a lienon the property. This requirement has no parallel in theassignment program: after assignment, HUD holds the mortgage andthus has no need to seek further security for forbearanceassistance.

Plaintiffs argue that in order to effectuate the statutoryintent — one to which HUD itself has frequently adverted in thecourse of these proceedings — that TMAP assistance be equivalentto assignment, the regulations should contain a provision forsubordination of the TMAP lien where such subordination isnecessary to enable the mortgagor to obtain a home improvementloan. The plaintiffs' expert testified at the hearing that it isfrequently difficult to obtain such a loan where the property issubject to a second lien. (Tr. 126-27) HUD's expert testified, tothe contrary, that home improvement loans frequently areunsecured and that where lenders do require security, they wouldnot as a matter of course require subordination. (Tr. 461-62) TheHUD expert also testified that in those cases where subordinationwould be required for a mortgagor to obtain a home improvementloan, HUD could exercise discretion to enter a subordinationagreement. (Tr. 462)

We are well aware of the importance to homeowners of securinghome improvement loans in order to maintain the value of theirproperty and we are convinced that it is an integral feature ofthe assignment program that it allows qualifying mortgagors toobtain such loans without the obstacle of a second encumbrance ontheir property. The undisputed intent of the statute is to makeTMAP and assignment assistance equal in quality. And the AmendedStipulation unambiguously requires future foreclosure avoidanceassistance equal in basic quality to the assignment program. Wetherefore see no basis for HUD's refusal to provide in itsimplementing regulations specific provisions for subordination ofthe TMAP security interest, where necessary to allow a mortgagorto obtain a home improvementloan for which he would qualify absent a second lien against hisproperty.

In light of its past record — as we have repeatedly beenobliged to emphasize — it is no answer for HUD to say that itwould exercise discretion to permit subordination in anappropriate case. HUD has repeatedly demonstrated itsunwillingness to exercise discretion in a manner that advancesthe national housing policies. Accordingly, its regulations mustunequivocally require subordination of the TMAP lien wherenecessary for a mortgagor's access to a home improvement loanthat would have been available under the assignment program.

The plaintiffs' final objection to the proposed regulationsconcerns the formula for implementation of Section 230(a)(6) andthat portion of Section 230(b)(2) that limits the availability ofTMAP and assignment respectively, where TMAP has previously beenprovided within a 12-month period. Section 230(a)(6), which hasbeen quoted above, provides that TMAP assistance may only be madeto those mortgagors who have made full payments for 12 monthsfollowing a prior period of assistance. And paragraph (b)(2)contains similar language with respect to assignments.12

The proposed regulations provide that TMAP shall be deemed tohave terminated — for purposes of both subsequent TMAP andsubsequent assignment — on the date the last TMAP payment ismade. See 24 C.F.R. §§ 203.640(b)(5) and 203.644(b)(5)

[proposed]. The plaintiffs' position is that this calculation ofdate of TMAP termination is unnecessarily restricted and onerousto mortgagors. They argue that it would be more beneficial if thetermination date were automatically set at 18 or 36 months fromthe date of the first TMAP. If their termination date were used,the plaintiffs argue, a mortgagor who received fewer than 18months of assistance, 8 months for example, would be permittedadditional TMAP if he defaulted again within the 18 month period,notwithstanding the 12-month limitation of paragraph (a)(6).

While we agree with plaintiffs that their proposal would bemore beneficial to certain mortgagors, we do not accept theirargument that HUD is required to implement regulationsincorporating their version of the appropriate termination date.The defect of the plaintiffs' reasoning is that they point to nofeature of or requirement or practice under the currentassignment program that would necessitate implementing theirproposed rule in order to preserve the quality of foreclosureavoidance assistance. Although, as plaintiffs indicate, HUD mayhave discretion under the current assignment program to allowadditional forbearance whenever it chooses, there is no evidenceto indicate that HUD must allow or ever has allowed additionalforbearance within 12 months of a period of reduced or suspendedpayments.

Whatever we may think of the wisdom of plaintiffs' proposedimplementation of paragraph (a)(6), there is no basis either inthe statute or in the Amended Stipulation for requiring it. Wetherefore conclude that sections 203.640(b)(5) and 203.644(b)(5)of the proposed regulations, which are consistent with theamended statute, are unobjectionable.

In summary, it is apparent that the proposed regulations wouldpermit HUD to charge higher interest on foreclosure avoidanceassistance and to allow that interest to begin to accrue at anearlier date than under the current Handbook practice. Theproposed regulations would eliminate all restrictions on thelevel of assistance that HUD is required to provide. In severaladditional respects, they would limit access to the foreclosureavoidance programs. And finally, the proposed regulations mayhave the effect of limiting assisted mortgagors' access to homeimprovement loans.

None of these reductions in the quality of foreclosureavoidance assistance is required by the recent amendments ofsection 230 and all of them are at variance with current practiceunder the Handbook as required bythe Amended Stipulation. HUD has offered no explanation for ordefense of many of the challenged downward revisions in thequality of assistance. Implementation of the proposed regulationsis plainly impermissible and would be in violation of the AmendedStipulation.

It is clear to us that what HUD sought when it went to theCongress and what it now seeks, by this attempt to modify itsagreement with the plaintiff class and its commitment to theCourt so as to exempt the TMAP regulations from the requirementsof the Amended Stipulation, is to scuttle that agreement and thecommitment embodied in the Amended Stipulation and to restricteven further the mortgage foreclosure assistance which it has soniggardly provided thereunder. If the Amended Stipulation is tobe modified in any respect, it should be tightened to eliminatethe ambiguities and the discretion which HUD has used to restrictthe mortgage foreclosure assistance program, thereby frustratingthe intention of Congress in enacting section 230.

We must confess our continuing frustration that our efforts tosecure reasonable implementation of a program agreed to by HUDwhich would further the Congressional purpose have been sorelatively unsuccessful. Despite a long, disgraceful history offootdragging, HUD now asks us to permit it an even broader rangeof discretion.

We observed in 1974 that HUD had, by its actions, in effectadministratively repealed the applicable statutes which Congresshad enacted to enable persons unable to qualify for conventionalmortgages to secure their own homes. Brown v. Lynn, supra, 385F. Supp. at 1000. Apparently, notwithstanding its agreements withthe plaintiff class and its commitments to the Court, HUD hasnever abandoned that effort. To give HUD the carte blanche whichit now seeks would, based on our experience, simply assure thatthe program would be further scuttled.

If Congress desires to repeal the program for the future, itcertainly can do so. So far as the plaintiff class of persons whoentered into contracts and mortgages on the assumption that theywould be dealt with in good faith are concerned, we feel obliged,within the limits of our authority, to assure them the reasonableopportunity to secure the homes which Congress gave to them.Granting HUD's motion clearly would be a total abrogation of thatobligation.

Nothing we have observed about the proposed TMAP regulationsand HUD's past performance should be misinterpreted as oppositionon our part to the concept of HUD's making mortgage assistancepayments in lieu of accepting an assignment of the mortgage,paying the mortgage in full currently and negotiating a reliefplan with the mortgagor. The TMAP concept is one withconsiderable merit in the appropriate case so long as itsimplementation does not derogate the intent of Congress and therights of mortgagors under the Amended Stipulation.Unfortunately, the proposed regulations do both.

CONCLUSION

Plaintiffs' motion to hold HUD in civil contempt is denied.Defendants' motion to modify the Amended Stipulation is alsodenied and defendants are enjoined from implementing the proposedregulations published at 47 Fed.Reg. 33252 (1982). An appropriateorder will enter.

1. The current regulations, which became effective in November,1976 and which continue to govern operation of the assignmentprogram, also contain the "circumstances beyond the mortgagor'scontrol" eligibility criterion. 24 C.F.R. § 203.650(5) (1982).

2. The "reasonable prospects" criterion is also contained in thecurrent regulations. 24 C.F.R. § 203.650(6) (1982).

3. HUD has included as an exhibit to its post-trial memorandum acopy of the proposed legislation which it forwarded to Congressin February 1980.

4. The House of Representatives measure provided for TMAP over an18-month period inclusive of the original period of default,unlike the enacted amendment of section 230, which provides thatassistance may initially cover 18 months in addition to thedefault period.

The House of Representatives measure, in Section 230(b)(1),provided for assignment assistance on a finding that TMAP wouldbe "impracticable" rather than, as in the enacted version,"inappropriate."

5. H.R. 7262 is identical to H.R. 2719. The bill that was reportedout of Committee was renumbered on the floor of the House.

6. Since the hearing, HUD has continued to submit monthlystatistical reports on its acceptance rates and statistics arenow available through December 1982. The rates for the periodAugust 1981 through December 1982 are: acceptances, 14.9%;referrals to mortgagee, 24.7%; and rejections, 60.5%.

7. HUD's statistical expert testified that, on his interpretationof the statistical data, the downward trend in the level ofacceptances actually began much earlier than the plaintiffs hadsurmised — in July 1980 — from which it would follow that theAugust 1981 memorandum did not precipitate a trend. See Tr. at319-20; Defendants' Exhibit # 5.

8. The statistical fluctuations on which the first of plaintiffs'contempt theories was based gave rise to allegations ofmisapplication of the assignment eligibility criteria. Thealleged failure to apply a "35% rule" in establishing paymentplans for accepted mortgagors is logically unrelated to the levelof acceptances. We speculated at the hearing that mortgagors wholearned they would be required to pay a huge fraction of theirincome to HUD may well have decided to forego HUD's offer of"assistance." (Tr. 378-79) In practice, HUD's interpretation ofits obligations — or lack thereof — with respect to formulationof payment plans may in fact be related to the decline inacceptance. No evidence was presented on this point, however.

9. HUD argues that we may avoid this inquiry. It suggests that theHouse and Senate Banking Committees' failure to invalidate theproposed regulations when they were transmitted to thoseCommittees pursuant to 42 U.S.C. § 3535(o), constituteslegislative acquiescence in the view that the proposedregulations further the intent of section 230. HUD's position ispatently without merit. See 42 U.S.C. § 3535(o)(5).

10. By contrast, in HUD's example, the February job loss mightlogically be said to have caused a May 1 default (as fixed underthe current regulations), despite the relative remoteness in timeof the latter event. We presume that, in a proper case, HUD wouldexercise its "judgment" to find the default in this situation"due to circumstances beyond the mortgagor's control."

11. In Etheridge, HUD took the position that § 203.330 of its ownregulations was inconsistent with a "Note" in Handbook ¶ 2-1(d)which reads as follows:

The current default is the only one to be considered in determining whether the mortgagor is in default due to circumstances beyond his or her control. If the record indicates that the present default was caused by some circumstance beyond the mortgagor's control, regardless of past history, this criterion is satisfied. If, however, the account was already delinquent when the qualifying circumstance first appeared, this criterion may or may not be satisfied. The mortgagor's ability to avoid the default may have been affected by the amount of the delinquency which already existed at the time the qualifying circumstance occurred; judgment must be exercised. Judgment is required also when an account, which has been chronically in default in the past, is current for one or two months and then a circumstance beyond the mortgagor's control arises and the account goes into default. Generally, if the account was current for two or more months immediately preceding the present default, the default should be considered to be a new one.

The court rejected HUD's argument that this provision of theHandbook required HUD to adopt a "two month rule" similar to theone now proposed for determining date of default.

12. Section 230(b)(3) indicates that assignment may be acceptedwithin 12 months of TMAP assistance, but only where theassignment is necessary to facilitate extension of the mortgageterm for up to 10 years.

MEMORANDUM OPINION

This class action was instituted in 1973 to assert variousalleged rights to foreclosure avoidance relief of the plaintiffclass of low and moderate income families who had purchased homeswith insured home mortgages under specified sections of theNational Housing Act. In 1976, plaintiffs and the then-remainingdefendants, the United States Department of Housing and UrbanDevelopment (hereinafter "HUD" or "the Department") and certainof its officials, theoretically settled the lawsuit. As part ofthe settlement, HUD agreed to implement a revised policy foraccepting assignments of insured mortgages in default in order toprovide foreclosure avoidance assistance to members of theplaintiff class. Our order, dated July 29, 1976, approved thesettlement and dismissal and incorporated by reference theparties' stipulation detailing HUD's obligations with respect tomortgage assignments.

Thereafter, from time to time, the plaintiffs objected to HUD'salleged violations of the July 1976 order. Finally, in August1979, the parties agreed to an Amended Stipulation which weapproved in November of that year. In the Amended Stipulation,HUD acknowledged that there had been "a significant incidence oferror in the administration of the [assignment] program" andagreed subsequently to administer that program in accordance withan internal manual, HUD Handbook No. 4191.2, later renumbered asHUD Handbook 4330.2 (hereinafter "the Handbook"), which had beenreviewed by counsel for the plaintiff class and was incorporatedby reference in the Amended Stipulation.

This matter is before us again on defendants' motion to modifyour November 1979 order incorporating and approving the AmendedStipulation and on the plaintiffs' motion to hold the defendantsin civil contempt for violation of the Amended Stipulation. Weheld a hearing on both motions commencing on September 30, 1982,and have subsequently received briefs from the parties. For thereasons hereinafter stated, defendants' motion to modify theAmended Stipulation is denied. The defendants are enjoined fromimplementing certain proposed regulations relating to TemporaryMortgage Assistance Payments and Assignments to HUD as previouslypublished, 47 Fed.Reg. 33252 (1982). Plaintiffs' motion forcontempt is also denied.

The Amended Stipulation

The Amended Stipulation, which is the focus of both motions,provides in paragraph 3 for HUD's operation of a mortgageassignment program consistent with the terms of the Handbook.Paragraph 3 provides:

HUD Handbook 4191.2, attached hereto as Appendix A, shall constitute binding instructions for implementation of the assignment program subsequent to the entry of this order. The Department shall administer the assignment program substantially in accordance with the terms of said Handbook. . . . The provisions of the Handbook may be modified in accordance with the Department's usual procedures. However, during the term of this Amended Stipulation the Department will not make any modification which would curtail the basic rights of mortgagors under the program now in existence. The Department will give notice to plaintiffs' counsel prior to final action on any modification.

The duration of the obligations created by the AmendedStipulation is set out in paragraph 14 of that agreement, whichprovides:

Except as provided in this paragraph, the rights and obligations created by this Amended Stipulation shall terminate five years from date of execution. The termination of the Department's specific obligations under this Amended Stipulation shall not diminish or compromise the Department's obligation construed under the National Housing Act as amended, and Section 2 of the Housing Act of 1949 and Section 2 of the Housing and Urban Development Act of 1968 to provide foreclosure avoidance relief for mortgagors in temporary financial distress, and the Department shall provide assistance or relief in the form of the present assignment program or an equivalent substitute to permit mortgagors in default on their mortgages to avoid foreclosure and to retain their homes during periods of temporary financial distress.

The Handbook, which is incorporated in the Amended Stipulation,sets out procedures for HUD's acceptance of assignments. It listsfive eligibility criteria for preforeclosure mortgage assignmentassistance, the two most important of which are that thecircumstances leading to default have been beyond the mortgagor'scontrol and that there be a "reasonable prospect" that themortgagor will be able to resume full mortgage payments followinga 36-month period of full or partial forbearance. The Handbookalso purports to describe the required terms for mortgagepayments to HUD on assigned mortgages. Those Handbook provisionsrelating to the terms of payment and other relevant provisionsare set out and discussed in some detail hereafter.

The Amended Stipulation further provides that HUD will maintainand furnish to the plaintiffs' counsel monthly statisticalreports on the processing of applications for assignment. AmendedStipulation ¶ 9. The monthly reports are to show the number ofapplications HUD has received, the number of assignments actuallyaccepted and the number referred back to the mortgagee for whatis termed "further servicing." They further indicate, withrespect to mortgages accepted for assignment, whether themortgagor has had payments reduced or suspended or is making afull or increased mortgage payment to HUD.

Statutory Developments

The statutory authority for the Department's operation of amortgage assignment program was, at the time of the AmendedStipulation, contained in former Section 230 of the NationalHousing Act, 12 U.S.C. § 1715u (1968), which provided inpertinent part:

Upon receiving notice of the default of any mortgage covering a one-, two-, three-, or four-family residence heretofore or hereafter insured under this chapter, the Secretary, in his discretion and for the purpose of avoiding foreclosure of the mortgage, and notwithstanding the fact that he has previously approved a request of the mortgagee for an extension of time for curing the default and of the time for commencing foreclosure proceedings or for otherwise acquiring title to the mortgaged property, or has approved a modification of the mortgage for the purpose of changing the amortization provisions by recasting the unpaid balance, may acquire the loan and security therefor upon payment of the insurance benefits in an amount equal to the unpaid principal balance of the loan plus any unpaid mortgage interest plus reimbursement for such costs and attorney's fees as the Secretary finds were properly incurred in connection with the defaulted mortgage and its assignment to the Secretary, and for any proper advances theretofore made by the mortgagee under the provisions of the mortgage.

As is apparent from a previous opinion in this case, HUD has astatutory obligation which formed the basis for the AmendedStipulation to provide mortgage foreclosure avoidance relief ina manner that will advance the national housing policy, stated in42 U.S.C. § 1441, of providing a decent home and suitable livingenvironment for every American family. Brown v. Lynn, 385 F. Supp. 986,998-99 (N.D.Ill. 1974).

Congress has since enacted the Housing and CommunityDevelopment Act of 1980, P-L 96-399, 94 Stat. 1614, 1659, whichamends Section 230 of the National Housing Act, 12 U.S.C. § 1715u(hereinafter "section 230" or "amended section 230") to permitHUD to provide foreclosure avoidance relief in the form ofTemporary Mortgage Assistance Payments (TMAP) to lendinginstitutions on behalf of eligible mortgagors as well as in thepreviously provided for form of mortgage assignment. Under TMAP,the mortgagee retains the mortgage and receives payments fromHUD. Under the assignment program, the mortgage itself isconveyed to HUD, which arranges terms for the mortgagor to makepayments to it. The amended version of section 230 now allows forprovision of the TMAP form of mortgage foreclosure avoidanceassistance under the same conditions as those under whichassignment was available under the earlier statute, asimplemented by the Handbook. Paragraph (a)(1) of the statute asamended provides:

(a)(1) Upon receiving notice of the default of any mortgage covering a one-, two-, three-, or four-family residence insured under this chapter, the Secretary (for the purpose of avoiding foreclosure of the mortgage, and notwithstanding the fact that the Secretary has previously approved a request of the mortgagee for an extension of the time for curing the default and of the time for commencing foreclosure proceedings or for otherwise acquiring title to the mortgaged property, or has approved a modification of the mortgage for the purpose of changing the amortization provisions by recasting the unpaid balance) may make all or part of the monthly payments due under the mortgage directly to the mortgagee on behalf of the mortgagor, if such default was caused by circumstances which are beyond the mortgagor's control and render the mortgagor temporarily unable to correct a mortgage delinquency and to resume full mortgage payments. Payments may be made only in accordance with the provisions of this subsection and shall be subject to any additional requirements the Secretary may prescribe.

The additional restriction on eligibility for relief now on theface of the statute — that the default shall have been caused bycircumstances beyond the mortgagor's control which render themortgagor temporarilyunable to correct the delinquency and resume full payments — isa codification of an eligibility criterion contained in theHandbook implementing the assignment program under the previousstatute. See Handbook ¶ 2-1(d).1

Amended section 230 now codifies the "reasonable prospect"criterion now contained in the Handbook ¶ 2-1(e).2 Paragraph(a)(2) now provides:

(2) No payments may be provided under this subsection unless the Secretary has determined that such payments are necessary to avoid foreclosure and that there is a reasonable prospect that the mortgagor will be able —

(A) to resume full mortgage payments within thirty-six months after the beginning of the period for which such payments are provided or upon termination of assistance under this subsection;

(B) to commence repayment of the payments made under this subsection at a time designated by the Secretary; and

(C) to pay the mortgage in full by its maturity date or by a later date established by the Secretary for completing the mortgage payments.

Although the wording of the statute is different from that in theHandbook and although the statute, in subparagraph (a)(2)(C),does not set a 10-year limit on possible mortgage term extension— as does the Handbook ¶ 2-1(e) — it is apparent that thedifferences are immaterial to operation of a TMAP programequivalent to the assignment program envisioned by the Handbook.

Paragraph (a)(3) provides for a level of assistance "in anamount determined by the Secretary" that may be as much as thetotal principal and interest due under the mortgage plusenumerated additional taxes, assessments and other expenses. Thesubsection provides:

(3) Payments under this subsection may be in an amount determined by the Secretary up to the amount of the principal, interest, taxes, assessments, ground rents, hazard insurance, mortgagee's expenses in connection with payments or repayments under this subsection, and mortgage insurance premiums due under the mortgage, and the initial payment may include an amount necessary to make the payments on the mortgage current. Payments may not exceed amounts which the Secretary determines to be necessary to supplement the amounts, if any, which the mortgagor is capable of contributing toward the mortgage payments.

Paragraph (a)(4) governs the duration of TMAP. This paragraphprovides for an initial limit of 18 months after default on theperiod for which payments may be made on behalf of a mortgagorand for extension of the initial assistance period by up to 18more months. Provision is made for periodic review of themortgagor's need during the assistance period. Paragraph (a)(4)provides:

(4) Payments under this subsection may be provided for a period of not to exceed eighteen months, and any period of default. Such period may be extended, in the Secretary's discretion, for not to exceed eighteen months where the Secretary has determined that such extension is necessary to avoid foreclosure and that there is a reasonable prospect that the mortgagor will be able to make the payments and repayments specified in paragraph (2) of this subsection. The Secretary shall establish procedures for periodic review of the mortgagor's financial circumstances for the purpose of determining the necessity for continuation, termination, or adjustment in the amount of the payments. Payments shall be discontinued at any time when the Secretary determines that, because of changes in the mortgagor's financial circumstances, the payments are no longer necessary to avoid foreclosure or that there is no longer a reasonable prospect that the mortgagor will be able to make the payments and repayments specified in paragraph (2) of this subsection.

These limitations on assistance are structurally similar to thelimitations on the period of reduced or suspended payments asoutlined in the Handbook ¶¶ 5-1 and 5-3.

Repayment of assistance is covered in paragraph (a)(5). Thatsubsection directs the Secretary to secure his assistance by alien on the property. The Secretary is given virtually completediscretion with respect to the level of interest charged onassistance and with respect to the terms of repayment. The onlyrestriction is a maximum limit on the interest charged onassistance; that rate may not exceed the maximum FHA interestlevel computed under section 203(b) of the Housing Act, 12 U.S.C. § 1709(b).Paragraph (a)(5) provides:

(5) All payments shall be secured by a lien on the property and by such other obligations as the Secretary may require. Payments shall be repayable upon terms and conditions prescribed by the Secretary, and such terms and conditions may include requirements for repayment of any amount paid by the Secretary toward a mortgagee's expenses in connection with the payment or repayments made under this subsection. The Secretary may establish interest charges on payments made under this subsection; except that such charges shall not exceed a rate which is more than the maximum interest rate applicable with respect to level payment mortgages insured pursuant to section 1709(b) of this title at the time assistance under this section is approved by the Secretary. Such charges shall be payable notwithstanding any provision of any State constitution or law or local law which limits the rate of interest on loans or advances of credit.

Finally, paragraph (a)(6) provides for repeated cycles ofassistance on behalf of a mortgagor only in cases where thatmortgagor has made full payments for 12 months followingtermination of the previous assistance. The language of paragraph(a)(6) is as follows:

(6) Payments under this subsection may be made without regard to whether the Secretary has previously taken action to avoid mortgage acquisition or foreclosure, except that payments may be provided on behalf of a mortgagor previously assisted under this section only in cases in which full mortgage payments (and any repayments to the Secretary which may have been requested) have been made by such mortgagor for at least 12 months from the time such previous assistance under this section was terminated.

As noted above, the amended version of section 230 provides forcontinued operation of the assignment program. Paragraph (b)(1)of the amended section now states in pertinent part:

(b)(1) When the Secretary receives notice of a default described in subsection (a)(1) of this section and makes a determination that assistance under subsection (a) of this section would be inappropriate in the case of the mortgagor, the Secretary (for the purpose of avoiding foreclosure of the mortgage, and notwithstanding the facts described in the parenthetical material contained in subsection (a)(1) of this section and the fact that payments have been made under subsection (a) of this section with respect to the mortgage) shall, if determined necessary by the Secretary, acquire the mortgage and security therefor upon payment of the insurance benefits in an amount equal to the unpaid principal balance of the mortgage plus any unpaid mortgage interest and reimbursement for such costs and attorney's fees as the Secretary finds were properly incurred in connection with the defaulted mortgage and its assignment to the Secretary, and for any proper advances theretofore made by the mortgagee under the provisions of the mortgage. After the acquisition of such mortgage by the Secretary, the mortgagee shall have no further rights, liabilities, or obligations with respect thereto.

The conditions under which assignment is now available areidentical to those under the previous statute, except for thefurther requirement that assignments are now to be accepted onlywhere the Secretary determines that TMAP is "inappropriate."

Paragraph (b)(2) sets out durational limits on the period ofreduced or suspended payments that may be provided for mortgagesaccepted for assignment. The statute provides that the initial18-month period of reduced or suspended payments may be extendedby up to 18 additional months where the eligibility criteriacontinue to be met. Compare section 230(a)(4). These durationallimits also parallel those in the Handbook. See Handbook ¶¶ 5-1,5-3. Paragraph (b)(2) also gives the Secretary broad discretionto structure repayment plans for assigned mortgages and allowsfor interest on assistance but only at a rate at or below the FHAmaximum. Compare section 230(a)(5). Paragraph (b)(2) reads asfollows:

(2) The Secretary may provide assistance, to a mortgagor whose mortgage has been acquired under paragraph (1) of this subsection, through forebearance of interest or principal, or both, or through other means, for a period of not more than eighteen months after the acquisition of the mortgage, if the mortgagor has not been assisted under subsection (a) of this section within twelve months of the date of such acquisition and if the Secretary determines that there is a reasonable prospect that the mortgagor will be able to meet the conditions described in subsection (a)(2) of this section. Such period may be extended, in the Secretary's discretion, for not to exceed eighteen months where the Secretary has determined that such extension is necessary to avoid foreclosure and that there is a reasonable prospect that the mortgagor will be able to meet the conditions described in subsection (a)(2) of this section. Such assistance (which may include any expenses of the Secretary incurred in connection with providing such assistance) shall be repayable upon terms and conditions prescribed by the Secretary, except that in no event shall any interest rate charged on such repayments exceed the interest rate chargeable for repayments of assistance made under subsection (a) of this section. Such rate shall be payable notwithstanding any provision of any State constitution or law or local law which limits the rate of interest on loans or advances of credit.

Paragraph (b)(3) of the amended statute allows the Secretary toacquire a mortgage with respect to which TMAP had been providedin order to permit extension of the mortgage term. That paragraphstates:

(3) In carrying out paragraph (1), the Secretary shall, if determined necessary by the Secretary, acquire a mortgage, with respect to which assistance was being provided under subsection (a) of this section immediately prior to such acquisition, for the sole purpose of extending the term of repayment under the mortgage so that the mortgagor will be able to make the full payments on the mortgage.

The amended section 230 also contains subsections (c) and (d)relating respectively to funding for the programs andhome-ownership counseling. Neither is directly pertinent to themotions before us today.

The 1980 housing amendments leave unaltered the obligatorynational housing policy as stated in 42 U.S.C. § 1441. Theforegoing analysis of the amendment of section 230 makes clear —and HUD does not contend to the contrary — that, with thepossible exception of the limitations on subsequent assistancecontained in paragraphs (a)(6) and (b)(2), the statute is notinconsistent with the continued provision of a mortgageforeclosure avoidance program as widely available and of as higha quality as the one currently in operation.

Moreover, our review of the legislative history of the 1980amendments confirms the conclusion that Congress did not intendto cut back on the availability and quality of mortgageforeclosure avoidance assistance. Amendment of section 230 wasinitially proposed by HUD officials who envisioned that thesuggested TMAP program would become "the predominant foreclosureavoidance mechanism to the maximum extent possible consistentwith [HUD's] . . . obligations under its Assignment Program" andthat it would eventually supersede the assignment programaltogether. See HUD Proposed Legislation and Commentary at 29,34, 39.3 The House of Representatives did not adopt the HUDproposal and instead passed legislation substantially identical4to the amended version of section 230 described above. The HouseProposal, H.R. 2719, specifically retained the assignment programand made no provision for that program's termination.

The House of Representatives Banking, Finance and Urban AffairsCommittee Report on H.R. 72625 emphasized that the amendinglegislation was not intended to affect the viability of mortgageforeclosure avoidance relief:

In designing TMAP the Committee has attempted to conform as closely as possible to the existing requirements of the assignment program. What the Committee has sought to do is assure that the assistance accorded to homeowners under both programs will be virtually the same. In essence the two approaches differ only in who actually holds the mortgage — under assignment it is the Secretary and under TMAP it is the private lender. The Committee has taken care to assure that the current structure, requirements and approach of the assignment program will not be altered by this legislation. [Emphasis added.]

House Report No. 96-979, 96th Cong. 2d Sess. at 53-54. Accordingto that report, the amending legislation was intended to allowHUD to implement a lower cost alternative to the assignmentprogram which would provide equally effective foreclosureavoidance relief. Id. at 51.

After passage, the House bill was apparently referred to aConference Committee which produced the changes referred to infootnote 4, supra. The Conference Committee also indicatedunequivocally that the purpose of the amendments to section 230was not to make assistance under that section more difficult toobtain, but only to provide a possibly lower cost alternative tothe assistance the Department was already authorized and requiredto provide. House Report No. 96-1420, 96th Cong. 2d Sess. at 123,U.S.Code Cong. & Admin.News 1980, p. 3506. The ConferenceCommittee further "expect[ed] the Secretary to take steps toassure that assistance provided under TMAP [be] consistent withthe relief provided under assignment, and to avoid inequities."Id. at 122, U.S.Code Cong. & Admin.News, p. 3667.

Following enactment, on September 30, 1980, of the amendmentsto section 230, HUD, on August 2, 1982, promulgated andpublished, see 47 Fed.Reg. 33242 (1982), the TMAP implementingregulations for which it now seeks our approval. The proposed newregulations provide inter alia for the rate and accrual date forinterest charged both on TMAP and on mortgage assignmentforeclosure assistance. They indicate that HUD has totaldiscretion with respect to the level of assistance provided underboth programs; they provide for determination of a date ofdefault for purposes of establishing whether the default was theresult of "circumstances beyond the mortgagor's control" and setout additional assistance eligibility requirements. The proposedregulations provide for review of the payment plans establishedunder both programs and they establish procedures for repaymentof both forms of assistance.Specific objections to the proposed regulations are analyzed indetail below.

Defendants propose that the Amended Stipulation be modified toinclude a new paragraph 16 which would provide:

16. Nothing in this Amended Stipulation affects or interferes in anyway [sic] with the Department's implementation of the TMAP program as authorized by Public Law 96-399.

Defendants ask that they be permitted to implement the proposedregulations pertaining to TMAP and the assignment program. Themodification and implementation are opposed by the plaintiffs whocontend that the regulations are inconsistent with HUD'sobligation under the Amended Stipulation to operate theassignment program or provide equivalent mortgage foreclosureavoidance relief. See Amended Stipulation ¶¶ 3, 14.

Motion for Contempt

Before reaching the merits of the contentions with respect toHUD's future obligations, we turn to the not unrelated question,raised by the plaintiffs' pending civil contempt motion, of thesatisfactoriness of HUD's performance to date under the formerstatutory scheme. Plaintiffs proceed in their civil contemptmotion on two apparently independent theories.

Their first argument is based on the monthly statisticalreports of HUD's action on mortgage assignment applications,which — they argue — show that in the period beginning in August1981, the number of applications accepted dramatically decreased.The plaintiffs argue that this marked drop in the acceptancelevel constitutes clear and convincing evidence that HUD hasfailed to operate the mortgage assignment program in good faithin accordance with the terms of the Handbook, as the AmendedStipulation requires.

The plaintiffs' statistical evidence, which was presented atthe hearing on this matter and not seriously disputed, doesreveal an unpredicted and unfortunate drop in the number ofmortgage assignments accepted by HUD in the seventeen monthperiod beginning in August 1981. The plaintiffs' expert dividedthe monthly statistical data provided by the defendants intothree time periods. The first, May 1976 through January 1979, wasa period for which HUD later conceded, see Amended Stipulation atp. 2, that there were serious deficiencies in the administrationof the assignment program. In that period, 18% of the total casesprocessed were accepted for assignment; in 23.1% of the cases,the application was referred to the mortgagee as a result of themortgagee's agreement to forego foreclosure and continue themortgage, see Handbook ¶ 3-6. HUD rejected the remaining 58.9% ofthe applications in that period.

The second period, February 1979 through July 1981, was one ofrelatively higher acceptances and referrals during which HUDaccepted 24.7% of the total applications it received and referred22.2% of the applications back to mortgagees. Some 53% of thetotal were rejected.

In the third and final period, however, beginning on August 1,1981, the number of acceptances as well as the combined number ofacceptances and referrals back to the mortgagees decreased belowthe level of either of the two prior periods. Through July 1982,the level of acceptances was 14.4%; that of referrals tomortgagees was 25.2%; and 60.4% of applications to the assignmentprogram were rejected.6

It was undisputed at the hearing that the precipitous declinein the level of mortgage assignments was no accident. Thedefendants' own expert testified that the likelihood of the drophaving occurred merely by chance was on the order of one in onedecillion. (Tr. 335) Plaintiffs argue that, because somenon-random factor has caused HUD's mortgage assignment rate toslip dramatically below even the level prior to the AmendedStipulation, the defendants, in order to avoid contempt citation,shouldbe required to show that the lower rate is not the result oftheir violation of the Stipulation.

That theory of statistical burden shifting is premised onseveral of the Supreme Court's discrimination cases, which, theplaintiffs argue, are authority for the proposition that thestatistical disparity between the third and the earlier twoperiods establishes a "prima facie case" that HUD violated theAmended Stipulation, shifting the burden to HUD to articulate orshow a permissible basis for the drop. See generallyInternational Brotherhood of Teamsters v. United States,431 U.S. 324, 334-43, 97 S.Ct. 1843, 1854-59, 52 L.Ed.2d 396 (1977);Hazelwood School District v. United States, 433 U.S. 299, 306-13,97 S.Ct. 2736, 2740-44, 53 L.Ed.2d 768 (1977); Castaneda v.Partida, 430 U.S. 482, 486-97, 97 S.Ct. 1272, 1275-82, 51 L.Ed.2d498 (1977).

The applicability of these cases to this motion for civilcontempt is problematic. We may not hold HUD in contempt of ourNovember 1979 order absent proof by clear and convincing evidencethat HUD violated a valid and unambiguous requirement of theAmended Stipulation or the Handbook. See, e.g., Shakman v.Democratic Organization of Cook County, 533 F.2d 344, 351 (7thCir.), cert. denied, 429 U.S. 858, 97 S.Ct. 156, 50 L.Ed.2d 135(1976); Vertex Distributing Inc. v. Falcon Foam Plastics, Inc.,689 F.2d 885, 892 (9th Cir. 1982); United States v. GreyhoundCorp., 363 F. Supp. 525, 570 (N.D.Ill. 1973), aff'd, 508 F.2d 529(7th Cir. 1974). And there is substantial question in our mindwhether this standard can be satisfied solely by the level ofstatistical proof that the plaintiffs have introduced here.

Equal Employment Opportunity Commission v. Plumbers' Union No.38, 28 Fair Empl.Prac.Cas. (BNA) 1567 (N.D.Cal. 1981), remanded,676 F.2d 709 (9th Cir. 1982), to which the plaintiffs havedirected our attention, involved proof relating to a consentdecree in an employment discrimination case that requiredindenture of a set quota of minority apprenticeship applicants.Plumbers' Local is therefore not authority for the propriety ofinferring from the statistical proof that the AmendedStipulation, which set no quotas or acceptance requirements, wasviolated. See also Aspira of New York, Inc. v. Board of Educationof the City of New York, 423 F. Supp. 647, 651 (S.D.N.Y. 1976)(failure to meet goals set by consent decree not grounds forholding defendants in contempt absent specific evidence ofdefendants' indifference to the decree) (dicta).

At the hearing, the plaintiffs sought to correlate the abruptdecline in the level of acceptances to an August 1981 HUDdecision to tighten up on application of the assignmenteligibility criteria. They introduced a memorandum or telegramfrom HUD's Washington, D.C. office to its field office personnel,dated August 5, 1981 — a date that roughly coincides with thebeginning of the plaintiffs' third period — which lamented thehigh number of defaults and foreclosures of HUD-assignedmortgages. That memorandum stated that "[t]he high default andforeclosure rate leads to a conclusion that the local officeshave misinterpreted and/or misapplied the assignment eligibilitycriteria in a great many cases." And the memorandum went on toinstruct Field Office personnel to use income before defaultrather than at the time of application to measure eligibility forassistance; to require positive evidence of ability to satisfythe reasonable prospect of ability to pay criterion; and, ingeneral, to place the burden "on the mortgagor to establish thateach of the [eligibility] criteria has been met rather than onthe Field Office to establish that it has not been." Theseprocedures, the memorandum stated, represented no change inpolicy from that announced in the Handbook and incorporated inthe Amended Stipulation in this case.

Even assuming that the August 5, 1981 memorandum was the directcause of the decline in the percentage level of assignments,7that memorandum is not direct evidencethat HUD has violated the terms of the Amended Stipulationor of the Handbook. It is clear that beginning at least as earlyas August 1981, HUD wished to limit access to the assignmentprogram. To that end, the Department decided to reverse thepresumption of eligibility for the program and to require strictproof of eligibility. But the plaintiffs have not demonstrated oreven suggested that HUD's actions in this regard violated clearand unambiguous directives in the Amended Stipulation or theHandbook.

The plaintiffs suggest that we should infer wrongdoing from thefact that the percentage level of mortgages assigned to HUDduring the third period, 14.4%, is actually lower than theinitial period level of 18%. In the initial period, there wasconcededly a "significant incidence of error in theadministration of the program." Amended Stipulation at p. 2. Andfor the assistance level now to have decreased below that of theinitial period in this subsequent period of record levels ofunemployment and other economic hardship beyond many mortgagors'control, is exactly the reverse of what we would have expected.

However, as the defendants properly emphasize, the AmendedStipulation does not require and the plaintiffs have notdemonstrated that there is a "normal" level of acceptance ofmortgage assignments that is associated with HUD's compliancewith the consent decree. It is readily apparent that HUD isaccomplishing far less than the terms of the Handbook and theAmended Stipulation would allow it to or than we believed wouldbe accomplished. It is lamentable from our point of view, and nodoubt acutely painful to rejected mortgagors who have lost theirhomes as a result, that HUD has chosen not to pursue the fullextent of relief that is permissible under the Handbook and theAmended Stipulation. Once again, HUD has violated the spirit, ifnot the letter, of its representations to and agreements with theplaintiff class and the Court.

Our surprise and disappointment at the statistical developmentsand HUD's performance or lack thereof may not, however, form thebasis for a finding that HUD failed properly to apply theeligibility criteria in the absence of proof that any specificprovision of the Handbook was violated. We conclude, therefore,that HUD may not be held in contempt by virtue of the unfortunatedecline in its mortgage assignments. This is not to suggest,however, that a further reduction in the number of assignmentsaccepted may not require a showing by HUD that such a reductionwas not the result of contemptuous conduct.

The plaintiffs' second and apparently unrelated8 ground forholding HUD in contempt, which is directed to the level ofassistance provided to those mortgagors who are accepted into theprogram, also gives us pause. The plaintiffs argue that theHandbook requires HUD to limit the mortgage payments that itrequires on mortgages that have been assigned to it to a levelsuch that not more than 35% of the mortgagors' net effectiveincome during the course of their payment programs is allocatedto housing expense. This so-called "35% rule" is certainly asensible one in light of the purpose of the assignment program toprovide temporary relief from onerous mortgage payments, and, aswe stated at the hearing (Tr. 365), it had been our understandingat the time we approved the Amended Stipulation that the rulewould apply to all payment plans. The plaintiffs apparently hadthat understanding as well. (Tr. 368)

Chapter 5 of the Handbook, which sets out the required policywith respect to formulationof repayment plans, does not, however, appear to require aceiling of 35% of net effective income in all cases. In a firstparagraph, 5-1, labeled "General," chapter 5 provides in part:

When developing payment plans, the Field Office must strike a balance between the current financial ability of the borrower and the need to pay the mortgage in full. If a mortgagor cannot immediately resume payments in the amount that will enable him/her to pay the mortgage in full by the maturity date, the Field Office may initially reduce or suspend payments for up to 18 months and may extend the maturity date of the mortgage by up to 10 years so as to reduce the monthly payment that would be required to pay the mortgage in full. A payment plan may be extended beyond 18 months only under unusual circumstances.

Paragraph 5-4 then describes how to arrive at the "PaymentAmount"; in part, it provides:

The Loan Specialist should develop a payment plan that, given the financial ability of the mortgagor, will enable the mortgagor to clear the delinquency as soon as possible and pay the mortgage in full. The Field Office is given broad discretion to tailor the payment program to individual needs. In addition, when the mortgagor is able to resume full monthly payments the Field Office may recast the mortgage and extend the term by up to ten years so as to reduce the monthly payment to an affordable amount.

a. During the period of reduced or suspended payments, the monthly payment demanded by the Field Office shall not cause the mortgagor's total housing expense to exceed 35 percent of net effective income. . . .

b. After a period of reduced or suspended payments or in order to cure a default under an existing payment program, the Field Office should develop a repayment program that will enable the mortgagor to reinstate the mortgage and pay the mortgage in full by its maturity date, or a date not more than 10 years after the maturity date. If the monthly payment required to pay the mortgage in full by the present maturity date plus 10 years . . . is less than or equal to 35 percent of the mortgagor's net effective income less other housing expense . . . a period of reduced or suspended payments may not be needed.

These provisions are full of discretionary language. Paragraph5-1, for example, does not require a period of reduced orsuspended payments in every case. By the terms of paragraph5-4(a), the 35% rule applies only in those cases where HUD haspreviously determined, in its discretion, that the mortgagorshould be allowed a period of reduced or suspended payments andthen only for the duration of that period of reduced or suspendedpayments. Although subparagraph 5-4(b) implies that somethinglike a 35% rule will be applied to determine whether a period ofreduced or suspended payments is to be allowed in a particularcase, the language of that subparagraph as well is entirelydiscretionary.

The plaintiffs argue that it is to be expected that a mortgageassignment program whose avowed purpose is "to give financiallydistressed mortgagors an opportunity to avoid foreclosure andretain their homes," Handbook ¶ 1-1, would provide a period ofreduced or suspended payments in every one — or all but a few —of the cases accepted for assignment. Plaintiffs thereforeconclude that the 35% rule contained in Handbook ¶ 5-4 shouldapply in virtually every case. These suppositions — and that isessentially all they are — appear logical to us as well.

In practice, however, HUD's monthly statistical reports and theuncontroverted testimony at the hearing (Tr. 222-25) reveal thatover 50% of the payment plans call for payments at the originalnote rate or higher. It was also conceded that a substantialnumber of the mortgagors accepted by HUD for assistance are neverallowed a temporary period of reduced or suspended mortgagepayments. (Tr. 453) HUD maintains that in those cases, thecircumstances that led to default had already been curedby the time HUD accepted assignment of the mortgage. By the clearterms of the Handbook, mortgagors who are deemed not in need ofa period of reduced or suspended payments are not entitled tospecific consideration of their available income in HUD'sdetermination of their payment plan.

It seems obvious that a mortgage payment plan which requiresallocation of over 35% of the mortgagor's net effective income tohousing expense is one that is likely to end in default andforeclosure. We are astonished at HUD's apparent policy routinelyto permit or require such payment plans to go into operation. Andwe are not at all surprised to learn, in light of that apparentpolicy, that by HUD's own reckoning — as expressed both in theAugust 5 memorandum and at the hearing — the rate of defaults andforeclosures of HUD assigned mortgages has been inappropriatelyand unfortunately high. (Tr. 423-26)

HUD's cavalier and taciturn response — that "nothing requires"it to apply the 35% rule to all payment plans — surprises us inlight of HUD's prior representations to us and its undeniableobligation to operate its foreclosure avoidance program so as tofulfill a National Housing Act policy of providing a decent homeand suitable living environment for every American family. See42 U.S.C. § 1441. That statutory obligation was imposed by theCongress and confirmed by us in an earlier opinion in this case,Brown v. Lynn, supra, and the obligation is now no longer open toquestion. See United States v. Winthrop Towers, 628 F.2d 1028,1032 (7th Cir. 1980). In light of that obligation, we would haveexpected that HUD would, at a minimum, provide some justificationfor its apparent conclusion that requiring mortgagors to allocatein excess of 35% of net effective income to housing expense infact advances that national housing policy.

Although we are dismayed at HUD's obvious lack of enthusiasmfor achievement of the national housing goals as established bythe Congress, we are able to discern in the Handbook only theclear requirement — with which HUD asserts it has complied — thatthe 35% rule be applied only during the period of reduced andsuspended payments allowed for certain eligible mortgagors. Wetherefore cannot find HUD in civil contempt for having apparentlylimited its application of that rule. We reach that conclusionwith considerable regret, because we believe the 35% rule is asound one in all cases and we were previously led to believe thatHUD agreed. The rule appears entirely consistent with the broadnational housing policy to which we have referred above as wellas with the purposes of the Amended Stipulation and we would havehoped that HUD would have applied it to all repayment plans.However, our views on the compatibility of the 35% rule withthese goals and purposes are no basis for a finding of contemptunder the Amended Stipulation. Cf. Hughes v. United States,342 U.S. 353, 72 S.Ct. 306, 96 L.Ed. 394 (1952). Again, however, HUDhas demonstrated that it will resolve any ambiguity so as torestrict or limit the relief it affords a mortgagor and makedefault and foreclosure more likely.

Modification of the Amended Stipulation to Permit Implementation of the Proposed TMAP Regulations

We turn now to HUD's motion to modify the Amended Stipulationto allow implementation of the proposed TMAP regulations — and tothe prospects for future provision of mortgage foreclosureavoidance relief.

As quoted above, the Amended Stipulation now requires, inparagraph 3, the operation through August 1984 of a mortgageassignment program in accordance with the "binding instructions"contained in the Handbook. Any modifications in the program mustpreserve the "basic rights" accorded mortgagors under theHandbook now in effect. Furthermore, HUD is obliged by paragraph14 of that Amended Stipulation, even after the termination of itsspecific obligations, to provide foreclosure avoidance relief formortgagors in temporary financial distress that is consistentwith HUD's obligations as construed under the National HousingAct, as amended, Section 2 of the Housing Act of 1949and Section 2 of the Housing and Urban Development Act of 1968.Paragraph 14 further provides: "the Department shall provideassistance or relief in the form of the present assignmentprogram or an equivalent substitute to permit mortgagors indefault on their mortgages to avoid foreclosure and to retaintheir homes during periods of temporary financial distress."[Emphasis added.]

Our previous discussion of the 1980 amendments makes clear thatthe statutory underpinning of the Amended Stipulation isfundamentally unchanged. In essence, the effect of the amendmentsis to permit HUD to use alternative means for providingequivalent foreclosure avoidance assistance. HUD may now assistmortgagors in temporary financial distress by providing TMAP aswell as — in those cases where TMAP is "inappropriate" — byacquiring the mortgage and forbearing to collect full orimmediate payments. It is clear that, while HUD soughtlegislation under which it could have made TMAP the soleforeclosure avoidance procedure, the intention and effect of the1980 amendments as enacted was to leave unaltered theavailability and quality of existing mortgage foreclosureavoidance assistance.

Further, we have no difficulty in concluding that the effect ofthose provisions of the Amended Stipulation that we have set outabove is also to require that the TMAP program be implemented ina manner which will provide foreclosure avoidance relief asnearly equivalent to that available under the assignment programas is consistent with the amended statute. We are bound toconstrue the Amended Stipulation not with narrow, mechanicalreference to its letter alone, but in light of its spirit andpurposes. See White v. Roughton, 689 F.2d 118, 119-20 (7th Cir.1982). And the undeniable purpose of paragraphs 3 and 14 of theAmended Stipulation — though neither paragraph explicitlyaddresses the unanticipated and undisclosed contingency of apossible amendment of section 230 within the five-year period forwhich the Handbook is binding — is to require, so long asprovided for by statute, mortgage foreclosure avoidanceassistance of at least as high a quality as that provided for inthe Handbook. In paragraph 14 the defendants promised — evenafter August 2, 1984 — to provide foreclosure avoidance relief atleast equivalent to the Handbook's assignment program, a promiseor obligation which the 1980 amendments can only be said to haveratified and underscored.

It follows from this that the defendants' proposed modificationto the Amended Stipulation, which would permit them to operatethe TMAP program without reference to HUD's obligations under theAmended Stipulation as agreed to and approved in 1979 and to befree of judicial oversight, is unacceptable. System FederationNo. 91, Railway Employees' Department, AFL-CIO v. Wright,364 U.S. 642, 81 S.Ct. 368, 5 L.Ed.2d 349 (1961), and State ofPennsylvania v. Wheeling & Belmont Bridge Co., 59 U.S. (18 How.)421, 15 L.Ed. 435 (1856), on which the defendants rely, do notmandate a different result. While a change or development in thelaw underlying the Amended Stipulation would oblige us to makeconforming modifications in that Stipulation, it is clear thatthere has been no such change.

Far from discerning any "necessary implication" in the 1980amendments or their legislative history that the AmendedStipulation should not govern the operation of TMAP, we aresatisfied that Congress wished the provision of mortgageforeclosure avoidance relief to continue unaltered and did notintend the amendments to supersede the Amended Stipulation'srequirement that HUD continue to provide relief "equivalent" tothe mortgage assignment program. In light of HUD's priorperformance, Congress wisely did not give HUD discretion tosubstitute TMAP for its obligations under the AmendedStipulation. Under these circumstances, there is no basis formodifying the Amended Stipulation so as to permit HUD to operateTMAP without reference to its obligations under the AmendedStipulation. See Environmental Defense Fund, Inc. v. Costle,636 F.2d 1229, 1241 (D.C.Cir. 1980).

Nor do we accept the plaintiffs' argument that the AmendedStipulation prohibits implementation of any TMAP program. Theplaintiffs appear to rely on paragraph 3 of the Stipulation whichprovides in part that the Handbook "shall constitute bindinginstructions for implementation of the assignment program" andthat HUD "shall administer the assignment program substantiallyin accordance with the terms of [the] Handbook." Plaintiffs alsopoint to those portions of section 230 that undeniably grant HUDdiscretion to continue operation of the assignment program.

If there is any basis in the language of the AmendedStipulation for concluding that it requires that the assignmentprogram be the sole or exclusive form of mortgage foreclosureavoidance relief, a conclusion with which we do not agree, thenthe 1980 amendments to section 230 would contravene and supersedesuch a limitation. The amendments to section 230 accord HUDpermission to operate a TMAP program as well as an assignmentprogram so long as there is no reduction in the availability andquality of mortgage foreclosure avoidance assistance. Given thislegislative grant of permission, we may not now refuse to allowimplementation of a TMAP program in a fashion consistent with theunaltered purposes of the statute and the Amended Stipulation.See System Federation No. 91, supra, 364 U.S. at 646-48, 81 S.Ct.at 370-72.

With these principles in mind, we turn to the regulations thatHUD has proposed and now seeks to implement.9 As is apparent fromthe foregoing, our analysis must determine whether the proposedregulations protect the basic rights secured to eligiblemortgagors by HUD's former commitment to operate its mortgageforeclosure avoidance program in accordance with the Handbook.Simply stated, if the proposed regulations do not preserve theavailability and quality of foreclosure avoidance assistance nowprovided for under the Handbook to the maximum extent that suchpreservation is permissible under amended section 230, then theyare inconsistent with the Amended Stipulation and may not beimplemented.

We emphasize that the plaintiffs have not suggested, and theissue before us is not merely whether, the HUD-proposedregulations are inconsistent with section 230 as amended andinvalid for that reason alone. If that were the only issue beforeus, we would agree with HUD's position that appropriate deferenceshould be accorded to HUD's interpretation and construction ofthe statute which it is charged with administering and we wouldnot hesitate to uphold the regulations if they were consistentwith a fair, non-arbitrary reading of the rule-making authorityvested in HUD by section 230. See Federal CommunicationsCommission v. Schreiber, 381 U.S. 279, 288-94, 85 S.Ct. 1459,1466-70, 14 L.Ed.2d 383 (1965); McElrath v. Califano,615 F.2d 434, 439 (7th Cir. 1980). But in this case, HUD is required to domore than merely promulgate regulations that are consistent withthe statute. Except insofar as the statute clearly contemplatesthe contrary, HUD must also achieve its obligations under theAmended Stipulation, to which it obviously still remains subject.With respect, in light of the foregoing, HUD's substantialfailure to address in its briefs the effect of certain of theproposed regulations on its obligations under the AmendedStipulation is an anomalous or even ominous omission.

The plaintiffs argue that there are numerous features of theproposed regulations that will unnecessarily render the terms offoreclosure avoidance assistance more onerous for mortgagors orrestrict the availability of such assistance. Three ofplaintiffs' objections relate to the proposed provisions for theinterest rate, date of interest accrual and repayment ofassistance with respect to the TMAP and mortgage assignmentprograms. The proposed TMAP regulation would read:

(a) Upon termination of TMAP, all TMAP made by the Secretary, together with interest accrued thereon from the dates of TMAP made by the Secretary at the maximum interest rate allowed under § 203.20 at the time the Secretary determines that the mortgagor is eligible for TMAP shall be immediately due and payable unless, pursuant to paragraph (b) below, the Secretary enters into one or more forbearance agreements.

(b) After termination of TMAP, the Secretary may enter into one or more forbearance agreements to postpone repayment of all or part of the TMAP, providing for monthly payments by the mortgagor:

(1) In an amount as the Secretary determines upon an examination of the mortgagor's financial condition and circumstances, and the mortgagor's ability to contribute to the mortgage payments.

(2) In such other amount or amounts as may be prescribed by regulation at the time of execution of any forbearance agreement.

24 C.F.R. § 203.644 [proposed].

And the proposed mortgage assignment regulation provides:

(a) Upon termination of the period of forbearance assistance the mortgagor shall repay to the Secretary all amounts forborne with interest thereon accrued and payable in accordance with the terms of the mortgage instrument.

(b) The mortgagor shall pay to the Secretary each month until the payments on the mortgage are current an amount based upon an examination of the mortgagor's financial condition and circumstances, and the mortgagor's ability to contribute to the mortgage payments. However, the repayment amount may not be less than the mortgagor's total payment to principal, interest, taxes, hazard insurance, mortgage insurance premiums, assessments, and ground rents.

24 C.F.R. § 203.649 [proposed].

Plaintiffs argue first that the rate of interest charged onTMAP — which under § 203.644(a) is the maximum allowed FHA rate,13.5% at the time of the hearing — is likely to be greater thanthe interest currently charged on the "amount forborne" under theHandbook assignment program, which, by HUD's account, is the sameinterest rate as that on the mortgage itself. See Handbook,Appendix 29. (Tr. 458) Plaintiffs contend that, particularly withrespect to older mortgages, the mortgage note rate will be lowerthan the current FHA maximum. The effect of this, the plaintiffsargue, is to restrict availability of mortgage foreclosureavoidance assistance.

At the hearing, the plaintiffs introduced expert testimony thatan increased interest rate would result in substantiallyincreased payments during the repayment period. (Tr. 110-16) Theeffect of the higher payments, it was charged, is to diminish thelikelihood or "reasonable prospect" that a mortgagor will be ableto make full repayment and, therefore, to adversely affecteligibility for the program. (Tr. 116-17) In addition, it wouldbe likely to produce a higher rate of future defaults andforeclosures.

HUD counters that, because of currently declining interestrates, the mortgage note interest rate may often in fact behigher than the FHA maximum with the result that the proposedTMAP regulations actually will work a benefit to mortgagors inmany cases. HUD also presented expert testimony at the hearingand HUD's expert emphasized that most mortgage defaults occurduring the first two years in the life of the mortgage. (Tr. 459)Because of the combination of currently declining interest ratesand unusually high interest levels over the past two years, theexpert suggested that most HUD-assisted mortgagors will bebenefited by the proposed TMAP interest formula. Theseconclusions were, in turn, challenged by plaintiffs' expert whoreasoned that the current unusually severe economic conditionsmay actually result in a higher than normal incidence of defaulton relatively elderly mortgages with interest rates well belowthe current FHA maximum. (Tr. 185-86)

We obviously cannot determine — either for current conditionsand trends or for thefuture — whether the note rate or the FHA maximum rate would bemore beneficial to the greater number of mortgagors. Our concernis only that mortgagors assisted under the new statutory schemereceive an interest rate on assistance that is as low as the onerequired by the Amended Stipulation and at least as low as thestatutory maximum.

It is clear that, with the enactment of the 1980 amendments tosection 230, the interest rate charged on any form of assistancemay never exceed the current FHA maximum. See section 230(a)(5)and (b)(2). The HUD-proposed maximum FHA interest rate is notrequired by the amended statute; HUD has merely chosen in theTMAP regulations to adopt the maximum interest rate that amendedsection 230 will permit. What is more, the current Handbookpractice is to charge an interest rate that would be lower thanthe FHA maximum in those cases where the mortgage note rate is infact lower than the current FHA rate.

It follows, and we conclude, that the combined — and consistent— effect of the amendments to section 230 and the AmendedStipulation is to prohibit HUD from charging interest onassistance greater than the lower of the mortgage note rate orthe current FHA maximum allowable interest rate. Only if HUD isrequired to adhere to that rule will mortgagors have the benefitof both the statutory ceiling on the allowable interest rate andthe full relief available under the Handbook. Because theproposed regulations do not require HUD to charge the mortgagenote rate on TMAP assistance when that is lower than the currentFHA maximum, they fail to preserve basic rights available underthe Amended Stipulation.

HUD suggests, however, that under the proposed regulations ithas, in effect, discretion to charge the mortgage note interestrate in cases where that is lower. Specifically, HUD appears tosuggest that, because the proposed regulations for mortgageassignments in § 203.649(a) call for interest equal to themortgage note rate, HUD may simply exercise its discretion todetermine that TMAP is "inappropriate" in a case where the noterate is lower than the FHA maximum, and accept a mortgageassignment instead, thereby precluding any variation between theterms of the proposed TMAP program and the Handbook's assignmentprogram.

While this is possible, we are not confident that HUD will infact exercise its discretion to accept a mortgage assignmentunder these circumstances. The provision of the proposedregulations concerning an administrative finding that TMAP is"inappropriate" makes no reference to a disparity in interestrates or to the relative difficulty of obtaining assistance underthe regulations and statutory provisions relating to the TMAP andassignment programs, respectively. The proposed regulations onlyprovide that TMAP is "inappropriate" (1) where the mortgageerefuses to accept TMAP on behalf of an eligible mortgagor (2)where the mortgagee is unwilling to extend the mortgage term andextension is necessary for the mortgagor to afford repayment and(3) where, for reasons beyond his control, the mortgagor isunable to execute the necessary TMAP documents. The proposedregulation on inappropriateness would provide:

(a) The Secretary will accept an assignment of a mortgage which meets the conditions of § 203.640(a)(1) through (6) if determined by the Secretary to be necessary to avoid foreclosure and if the Secretary determines that TMAP would be inappropriate in the case of the mortgagor. In applying § 203.640(a)(4) the term "assistance" is deemed to refer to forbearance assistance pursuant to § 203.646. Among other grounds, TMAP shall be determined to be inappropriate if the mortgagee refuses to accept TMAP or if extension of the mortgage maturity (by not more than 10 years after the original maturity) would be necessary in order for the mortgagor to afford repayment and the mortgagee is unwilling to do so. If a mortgage is found ineligible for TMAP due to the mortgagor being unable to execute the documents required by the Secretary to assure repayment of the TMAP (§ 203.640(b)(7)), an assignment will be accepted where the inability is caused by circumstances beyond the mortgagor's control.

(b) A mortgage shall not be eligible for assignment in any case where:

(1) The mortgaged property has been abandoned, or has been vacant for more than 60 days, or

(2) The mortgagor, after being clearly advised of the options available for relief, has clearly stated in writing that he/she has no intention of fulfilling his/her obligation under the mortgage, or

(3) The mortgagee is prevented by law from initiating foreclosure of the mortgage, or

(4) The mortgagor owns two or more properties occupied by tenants who are paying rent, and the rental income is not being applied to the mortgage under review, or

(5) TMAP have been paid on behalf of the mortgagor within twelve months of the date of the assignment request to the Secretary, except that the Secretary may accept assignment of a mortgage with respect to which TMAP were made immediately prior to the assignment for the sole purpose of extending the term of repayment under the mortgage so that the mortgagor will be able to make the full payments on the mortgage; or

(6) The property is owned by a partnership or corporation, or

(7) TMAP were not provided because the mortgagor was unwilling to execute the documents required by the Secretary to assure repayment of the TMAP.

24 C.F.R. § 203.645 [proposed].

What is more, HUD's performance under the Amended Stipulationto date gives us reason to be skeptical of its current assurancesthat it will exercise "discretion" to find TMAP inappropriate ina fashion that will facilitate foreclosure avoidance assistanceequivalent to the Handbook. Under the Amended Stipulation, HUDhas consistently, it appears, exercised its discretion inprecisely the opposite direction — to limit access to theassignment program and to limit the level of assistance provided.

Moreover, since HUD has made it clear that it intends toutilize TMAP wherever possible so as to reduce its currentexpenditures and would have endeavored to replace acceptance ofmortgage assignments entirely with TMAP if Congress hadauthorized it to do so, it seems unlikely, if not inconceivable,that HUD would find TMAP inappropriate solely on the ground thatit desired to give a mortgagor the benefit of a lower interestrate. We therefore have no reason to rely on HUD's assurancesthat it will exercise its discretion in a manner that willmaximize — not minimize — access to assistance under itsforeclosure avoidance relief operations. On the contrary, givenHUD's consistent practice of resolving all doubts as to itsobligations against a mortgagor, we must assume that anydiscretion given HUD or any ambiguity in the TMAP regulationswill be similarly utilized.

Nor are we moved by HUD's assurances that it will exercise itsdiscretion under proposed § 203.644(b) to enter into forbearanceagreements with the effect — it is implied — of eliminating theadverse affect on eligibility of possibly higher interest chargesby allowing mortgagors to repay TMAP assistance after themortgage is retired. HUD has nearly absolute discretion underproposed § 203.644(b) with respect to forbearance agreements andthere is no indication in the record of this case or requirementin the regulations themselves that HUD will exercise thatdiscretion in the manner suggested. The proposed regulations donot clearly provide that mortgage foreclosure avoidanceassistance shall be subject to an interest rate no higher thanthat currently charged on assistance provided under the Handbook.Those regulations therefore denigrate "basic rights" under theHandbook, do not provide for an "equivalent" form of foreclosureavoidance assistance, and may not, consistent with the AmendedStipulation, be implemented.

The plaintiffs' second attack on the above-quoted provisions ofthe proposed regulations concerns their alleged inconsistencywith the current Handbook procedure of not charging interest onthe amount of forbearance until after the period of reduced orsuspended payments. See Handbook, Appendix 6. The proposedregulations provide that interest will begin toaccrue on the amount of assistance payments or forbearance as ofthe dates thereof. HUD does not suggest that the plaintiffs havemisstated the practice of forgiveness of interest under thecurrent Handbook or misconstrued the intent and effect of theproposed regulations.

The imposition of an additional interest obligation on assistedmortgagors — one that is not required and, in all probability,not contemplated by the amendments to section 230, see Section230(a)(5) and (b)(2) — results in a more onerous payment burdenfor those assisted, more probability of future default andforeclosure, and may also limit eligibility for assistancebecause higher repayment obligations may preclude certainmortgagors from satisfying the "reasonable prospect" criterion.Therefore, insofar as §§ 203.633 and 203.649 require interest onassistance to accrue from the date of the assistance, thosesections of the proposed regulations do not preserve basic rightsunder the Amended Stipulation and may not be implemented.

Third, the plaintiffs contend that the proposed regulations areinconsistent with the Handbook because they require, with respectto TMAP, that the full TMAP assistance is due and payableimmediately after TMAP assistance is terminated, § 203.644(a),and, with respect to mortgage assignment, that the "foreborneamount" is due after the termination of mortgage assistance in anamount determined by HUD, § 203.649.

Under the current Handbook ¶ 5-4(b), as implemented by Appendix6, HUD is required to develop a repayment program that will allowan assisted mortgagor to retire the mortgage by the originalmaturity date extended, if necessary, by up to 10 years. Inpractice, the HUD Payment Plan Worksheet, Appendix 6, allows foronly two methods for structuring repayment. And under each ofthem, the repayment of assistance is prorated or amortized overthe life of the mortgage, which may be extended, in HUD'sdiscretion, by up to 10 years. Section 230 as amended, seeSection 230(a)(5) and (b)(2), grants the Secretary broaddiscretion in structuring repayment plans under both the TMAP andthe assignment programs; continuation of the present practice ofprorating repayment of assistance over an extended mortgage termis not inconsistent with the amended statute.

It is, of course, correct that under the proposed regulationsHUD is to examine the mortgagor's financial circumstances andability to contribute to the mortgage payments in determining howto structure repayment of the forborne amount under the proposedassignment program or whether to enter a forbearance agreementunder the TMAP program. There is nothing in the proposedregulations to circumscribe HUD's discretion with respect to thisexamination, however. And there is therefore nothing to preventHUD from requiring repayment on terms even more onerous thanproration over the original term of the mortgage which is themost severe repayment schedule, following a period offorbearance, which HUD may now require under the Handbook ¶5-4(b) and Appendix 6.

As we have said before — and it is an observation that deservesemphasis — we have ample reason to believe, in light of pastperformance, that, given discretion to require assistancerepayment terms more onerous than under the Handbook, HUD will,in many instances, do so. Thus, because the proposed regulationsgive HUD virtually unfettered discretion with respect to thetiming and amount of required assistance repayments, the proposedregulations are inconsistent with the Amended Stipulation and maynot be implemented.

The plaintiffs have also drawn our attention to the sections ofthe proposed regulations that concern the level of assistanceprovided under TMAP and the proposed assignment programrespectively. They provide:

Monthly TMAP on behalf of a mortgagor may be in an amount as the Secretary determines based upon an examination of the mortgagor's financial condition and circumstances, and the mortgagor's ability to contribute to the mortgage payments. However, monthly TMAP may not exceed the mortgagor's total payment to principal, interest, taxes, hazard insurance, mortgage insurance premiums, assessments and ground rents.

24 C.F.R. § 203.641(a) [proposed].

The Secretary will provide assistance to a mortgagor whose mortgage has been assigned under § 203.645, through forbearance, in an amount based upon an examination of the mortgagor's financial condition and circumstances, and the mortgagor's ability to contribute to the mortgage payments. However, the forbearance amount may not exceed the mortgagor's total payment to principal, interest, taxes, hazard insurance, mortgage insurance premiums, assessments and ground rents.

24 C.F.R. § 203.646 [proposed].

We have previously considered at some length the level ofassistance currently available under the Handbook. And weconcluded that, while the intent of the Handbook is notaltogether clear, the so-called 35% rule — reflecting the maximumpayment a mortgagor could be required to make and, therefore, thelevel of assistance — clearly applied only during the period ofreduced or suspended payments allowed for those mortgagors luckyenough to have been found entitled to such a period.

A cursory glance at the proposed sections of the regulationsquoted above reveals that HUD now proposes to jettison the 35%rule altogether and not to be bound by it even during the actualforbearance or assistance period as Handbook ¶ 5-4(a) now clearlyrequires. There is nothing in the amendments to section 230 tosuggest that this result is required or even contemplated. Whilewe noted above that HUD's limited application of the 35% ruleresults in more defaults and foreclosures than we had expected orhoped would occur under the Amended Stipulation program, ithardly follows that we — or the affected mortgagors — would bejust as content to have the 35% rule disappear altogether. Thefailure to provide even a limited 35% rule, consistent with theclear requirement of Handbook ¶ 5-4(a), can only further increasethe incidence of default and foreclosure. And that failure alsorenders the proposed regulations inconsistent with the AmendedStipulation and constitutes an additional reason why they may notbe implemented.

The plaintiffs raise three inconsistencies of the proposedregulations with provisions of the regulations under which theassignment program currently operates. These current regulationsare, of course, part and parcel of the "present assignmentprogram" that HUD is required at least to equal in any futureforeclosure avoidance programs that it may operate, see AmendedStipulation ¶ 14, and HUD may not modify these regulations unlessthe modification preserves the current quality and availabilityof assistance. We therefore turn to the plaintiffs' argumentsthat the proposed regulations, in certain respects, reduce theavailability and level of foreclosure avoidance assistanceprovided for by the current regulations.

As described earlier, amended section 230(a)(1) codifies theHandbook rule, Handbook ¶ 2-1(d), that only mortgagors who havedefaulted due to circumstances beyond their control are eligiblefor assistance. The plaintiffs also object to the proposedformula for determining "date of default" for purposes ofapplying this eligibility criterion. Under the current assignmentprogram, pursuant to 24 C.F.R. § 203.330, the date of default isdetermined as follows:

A mortgage account is delinquent any time a payment is due and not paid. If the mortgagor fails to make any payment, or to perform any other obligation under the mortgage, and such failure continues for a period of 30 days, the mortgage shall be considered in default for the purposes of this part.

The plaintiffs suggest — and HUD in its response does not disputethe point — that the effect of the current Handbook wording is toallow a mortgagor, in effect, to cure a default by making paymentof a delinquent amount after the month in which payment is due.The parties apparently agree that under the current regulation,a mortgagor who brought his account current by making his March1 payment on March 3, who thenmade the April 1 payment on May 2 and the May 1 payment on June2, but who thereafter made no payments, would be in default, forpurposes of the eligibility determination, on June 1.

The proposed regulations provide:

(a) The Secretary may make temporary mortgage assistance payments (TMAP) to the mortgagee on behalf of a mortgagor who owns the property, when the following conditions are met:

(3) The mortgagor's default has been caused by circumstances beyond the mortgagor's control which rendered the mortgagor temporarily unable to correct the delinquency within a reasonable time and to make full mortgage payments. For the purpose of evaluating this criterion, the date of default shall be 60 days following the first day of the most recent month in which the mortgagor made a payment(s) within the month due which brought the account current. Payments made by the mortgagor after the date of default which are insufficient to bring the account current will not change the date of default.

24 C.F.R. § 203.640(a)(3) [proposed].

The effect of the proposal, plaintiffs point out, is adverselyto affect the eligibility chances of mortgagors who have fallena payment behind on their mortgages and who, despite makingregular payments, have failed to become current. Plaintiffs raisethe case of a homeowner who makes his January 1 payment onJanuary 6, his February 1 payment on March 6, his March 1 paymenton April 10 and his April 1 payment on May 5 and no paymentsthereafter. The plaintiffs assume that the homeowner lost his jobon April 20. Under the current regulation, as interpreted by bothparties, May 1 would be the default date. Application of thedefault date formula in the proposed regulation, however, yieldsa March 1 default date. (March 1 is 60 days after January 1, thefirst day of the most recent month in which the mortgagor made apayment within the month due to bring the account current.) Thus,under the proposed regulations, the homeowner in the examplecould not use the April 20 loss of employment as a "circumstancebeyond his control" in order to qualify for assistance. Thedefault date, by definition, would now occur prior to the eventnotwithstanding the fact that the ultimate default may actuallyhave been caused by the April 20 job loss.

HUD's only argument in response is that the plaintiffs' exampledoes not demonstrate an inherent, universal disadvantage of theproposed regulations, since it only fortuitously places the jobloss at April 20 where the proposed regulations will, HUDconcedes, restrict eligibility. HUD poses a counter-hypotheticalin which the homeowner, who has the same payment history, loseshis job in February and then regains employment in April and then— in the HUD hypothetical — makes no further mortgage payments,an unlikely scenario. In this case, HUD argues, the currentregulations, which would place the default date at May 1, wouldactually be less advantageous than the proposed regulations,under which the March 1 default date is closer in time to the jobloss. Thus, HUD's argument continues, it is really a matter ofchance whether a mortgagor will be hurt or benefited by thechanged formula and there is therefore no basis for concludingthat the proposed regulations are inherently inferior.

HUD offers no explanation why it has jettisoned one defaultdate formula for another formula that — it would have us believe— can only have a random effect on eligibility. Even putting thatincongruity aside, however, HUD's hypothetical is an insufficientanswer to the concerns raised by the plaintiffs. Initially, itstrikes us as highly improbable that a homeowner who, having losthis job but having continued to make delinquent payments on hismortgage, would — shortly after regaining employment — ceasemaking payments altogether.

But more fundamentally, HUD's rejoinder misses the point ofplaintiffs' objection. The effect of the proposed regulation isto tie the date of default to a requirement that the mortgagepayment have been made in the month for which it is due.Therefore, whenever a mortgagor continues for more than twomonths to make delinquent payments later than the month for whichthe payments are due, the time frame for "circumstances leadingto default," is foreshortened by the proposed regulations. Anevent succeeding the default cannot logically be said to causethe default,10 and the clear effect of the proposed regulations,under these circumstances, is to limit the range of events thatmay be considered in determining the reason for a default. HUDcannot explain away the fact that its proposed regulations willexclude from assistance many mortgagors who have fallen behind intheir mortgage payments over a period and who thereafter becomeunable, through circumstances beyond their control, to continuemaking any payments.

The current regulation, as the parties agree, permits suchmortgagors to cure their defaults and still qualify forassistance when some subsequent emergency causes them to ceasemaking payments altogether. The current regulation plainlyaccords with the letter and spirit of the Amended Stipulation, asanother court has already emphatically held. Etheridge v.Beasley, 532 F. Supp. 266, 270-71 (N.D.Ga. 1981).11 It is alsoclear that the proposed regulations will adversely affect theeligibility of a definable class of mortgagors who would beeligible for assistance under the current regulation. Theproposed regulation is therefore an impermissible implementationof the general requirement of Section 230(a)(1) and (b)(1) thata default have been caused by circumstances beyond themortgagor's control.

The plaintiffs also point to a change in 24 C.F.R. § 203.606(b)that is contained in the proposed regulations. Section203.606(b)(3) now provides:

(b) If the mortgagee determines that any of the following conditions have been met, the mortgagee may initiate foreclosure without sending the assignment notices required by §§ 203.651 and 203.652.

(3) The mortgagor owns two or more properties occupied by tenants who are paying rent, and the rental income from the property under review is not being applied to the mortgage on that property. [Emphasis added.]

The proposed section 203.606(b)(3) would read:

(b) If the mortgagee determines that any of the following conditions have been met, the mortgagee may initiate foreclosure without sending the notices required by §§ 203.650 and 203.651 and without the delay in foreclosure required in paragraph (a) of this section:

(3) The mortgagor owns two or more properties occupied by tenants who are paying rent and the rental income is not being applied to the mortgage under review.

The proposed regulation thus automatically excludes fromeligibility a broader class of mortgagors than is automaticallyexcluded under the current regulation. Specifically, the proposedregulation would permit a mortgagee to foreclose without noticeand without delay any mortgage in default if the mortgagor ownstwo or more properties occupied by tenants and is not applyingthe rent from all the properties to the mortgage under revieweven though the rent may be being applied to mortgages on theproperties which generated it. The current regulation requiresapplication only of the rental income from the property underreview.

HUD has offered no explanation or defense of this apparentlyinexplicable expansion of the automatic exclusion. The statute asamended does not require or even authorize any automaticexclusions. And while it may be that the number of mortgagorsaffected by this unexplained change in the regulations will berelatively small, it is quite clear that the change will directlyand adversely affect their basic rights. We have no assurancethat HUD will construe proposed section 203.606(b)(3) as theequivalent of the current regulation. The language has clearlybeen changed and we can only assume that HUD will apply therevised version since it is less favorable to mortgagors.Therefore, the proposed regulation is inconsistent with theAmended Stipulation. It may not be implemented.

Finally, the plaintiffs have drawn our attention to section203.640(a)(5) of the proposed regulations relating to exclusionfrom assistance for mortgages on property not the principal placeof residence of the mortgagor:

(a) The Secretary may make temporary mortgage assistance payments (TMAP) to the mortgagee on behalf of a mortgagor who owns the property, when the following conditions are met:

(5) The property is the mortgagor's principal place of residence. This criterion may be waived by the Secretary if such waiver is determined to be in the best interests of the Department.

The current regulations include an additional clause:

(a) The Secretary will accept assignments of mortgages insured under this part in order to avoid foreclosure when the following conditions are met:

(3) The property is the mortgagor's principal place of residence. This criterion may be waived by the Secretary if the property has been leased or rented and the rental income has been applied to the mortgage delinquency or to effect repairs necessary to maintain the property in a safe and habitable condition or if such waiver is determined to be in the best interests of the Department. [Emphasis added.]

HUD has contended, and we agree, that the deletion in theproposed regulation curtails no basic rights of mortgagors underthe current program. The deleted language is plainlydiscretionary; it may not be read as vesting in mortgagors anyright to waiver of the condition. With respect to this particularsection, we therefore conclude that the proposed regulations arenot inconsistent with the current operation of the assignmentprogram though the wording, unfortunately, portends that HUDmight, in the future, choose to limit the cases in whichdiscretion will be exercised in favor of the mortgagor.

The provisions in the proposed regulations for review ofpayment plans are, however, inconsistent with the AmendedStipulation. Sections 203.643(c) and 203.648(c) of the proposedregulations would provide for mandatory review of payment plansonly in the case of a mortgagor whose gross income has decreasedby $50.00 or more per month. The Amended Stipulation, however, inparagraph 7, provides for mandatory review under a considerablywider range of circumstances:

7. HUD shall review and, as appropriate, restructure payment plans of assigned mortgages to ensure that they are reasonable and comport with24 C.F.R. § 203.650-662 and Handbook 4191.2 under the following circumstances:

(a) Before any action has been taken by reason of mortgagor default;

(b) When the terms of such a plan expire;

(c) When a plan is in default for three months or longer;

(d) When the terms of an existing plan extend more than six (6) months from the Order date;

(e) When a mortgagor so requests for good cause.

Under ordinary conditions, we might presume that no negativeinference was intended by the proposed regulation's failure tolist all of the circumstances which, under the AmendedStipulation, now trigger mandatory review of payment plans.However, the history of this lawsuit demonstrates that HUD is noordinary litigant. HUD is seeking leave to amend the AmendedStipulation to permit implementation of TMAP apparently totallywithout regard to the provisions of that stipulation; and in thiscontext, we can only assume that, by these sections of theproposed regulations, HUD intends to bypass or eliminate thereview procedures mandated by the Amended Stipulation.

It is quite clear, in any case, that the payment plan reviewprocedures contained in the Amended Stipulation are binding onHUD for the duration of the stipulation with respect not only tothe assignment program, but with respect to the new TMAP programas well. To the extent any regulations provide or imply thecontrary, they are, unless mandated by statute — as the proposedreview procedures in issue here manifestly are not, see Section230(a)(4) — in violation of the Amended Stipulation.

The proposed regulations also contain an omission which, theplaintiffs argue, unnecessarily renders the quality of theassistance provided under TMAP inferior to that available underboth the current and revised versions of the assignment program.The plaintiffs point to the fact that Section 230(a)(5) requiresthe Secretary to secure all TMAP that he has provided by a lienon the property. This requirement has no parallel in theassignment program: after assignment, HUD holds the mortgage andthus has no need to seek further security for forbearanceassistance.

Plaintiffs argue that in order to effectuate the statutoryintent — one to which HUD itself has frequently adverted in thecourse of these proceedings — that TMAP assistance be equivalentto assignment, the regulations should contain a provision forsubordination of the TMAP lien where such subordination isnecessary to enable the mortgagor to obtain a home improvementloan. The plaintiffs' expert testified at the hearing that it isfrequently difficult to obtain such a loan where the property issubject to a second lien. (Tr. 126-27) HUD's expert testified, tothe contrary, that home improvement loans frequently areunsecured and that where lenders do require security, they wouldnot as a matter of course require subordination. (Tr. 461-62) TheHUD expert also testified that in those cases where subordinationwould be required for a mortgagor to obtain a home improvementloan, HUD could exercise discretion to enter a subordinationagreement. (Tr. 462)

We are well aware of the importance to homeowners of securinghome improvement loans in order to maintain the value of theirproperty and we are convinced that it is an integral feature ofthe assignment program that it allows qualifying mortgagors toobtain such loans without the obstacle of a second encumbrance ontheir property. The undisputed intent of the statute is to makeTMAP and assignment assistance equal in quality. And the AmendedStipulation unambiguously requires future foreclosure avoidanceassistance equal in basic quality to the assignment program. Wetherefore see no basis for HUD's refusal to provide in itsimplementing regulations specific provisions for subordination ofthe TMAP security interest, where necessary to allow a mortgagorto obtain a home improvementloan for which he would qualify absent a second lien against hisproperty.

In light of its past record — as we have repeatedly beenobliged to emphasize — it is no answer for HUD to say that itwould exercise discretion to permit subordination in anappropriate case. HUD has repeatedly demonstrated itsunwillingness to exercise discretion in a manner that advancesthe national housing policies. Accordingly, its regulations mustunequivocally require subordination of the TMAP lien wherenecessary for a mortgagor's access to a home improvement loanthat would have been available under the assignment program.

The plaintiffs' final objection to the proposed regulationsconcerns the formula for implementation of Section 230(a)(6) andthat portion of Section 230(b)(2) that limits the availability ofTMAP and assignment respectively, where TMAP has previously beenprovided within a 12-month period. Section 230(a)(6), which hasbeen quoted above, provides that TMAP assistance may only be madeto those mortgagors who have made full payments for 12 monthsfollowing a prior period of assistance. And paragraph (b)(2)contains similar language with respect to assignments.12

The proposed regulations provide that TMAP shall be deemed tohave terminated — for purposes of both subsequent TMAP andsubsequent assignment — on the date the last TMAP payment ismade. See 24 C.F.R. §§ 203.640(b)(5) and 203.644(b)(5)

[proposed]. The plaintiffs' position is that this calculation ofdate of TMAP termination is unnecessarily restricted and onerousto mortgagors. They argue that it would be more beneficial if thetermination date were automatically set at 18 or 36 months fromthe date of the first TMAP. If their termination date were used,the plaintiffs argue, a mortgagor who received fewer than 18months of assistance, 8 months for example, would be permittedadditional TMAP if he defaulted again within the 18 month period,notwithstanding the 12-month limitation of paragraph (a)(6).

While we agree with plaintiffs that their proposal would bemore beneficial to certain mortgagors, we do not accept theirargument that HUD is required to implement regulationsincorporating their version of the appropriate termination date.The defect of the plaintiffs' reasoning is that they point to nofeature of or requirement or practice under the currentassignment program that would necessitate implementing theirproposed rule in order to preserve the quality of foreclosureavoidance assistance. Although, as plaintiffs indicate, HUD mayhave discretion under the current assignment program to allowadditional forbearance whenever it chooses, there is no evidenceto indicate that HUD must allow or ever has allowed additionalforbearance within 12 months of a period of reduced or suspendedpayments.

Whatever we may think of the wisdom of plaintiffs' proposedimplementation of paragraph (a)(6), there is no basis either inthe statute or in the Amended Stipulation for requiring it. Wetherefore conclude that sections 203.640(b)(5) and 203.644(b)(5)of the proposed regulations, which are consistent with theamended statute, are unobjectionable.

In summary, it is apparent that the proposed regulations wouldpermit HUD to charge higher interest on foreclosure avoidanceassistance and to allow that interest to begin to accrue at anearlier date than under the current Handbook practice. Theproposed regulations would eliminate all restrictions on thelevel of assistance that HUD is required to provide. In severaladditional respects, they would limit access to the foreclosureavoidance programs. And finally, the proposed regulations mayhave the effect of limiting assisted mortgagors' access to homeimprovement loans.

None of these reductions in the quality of foreclosureavoidance assistance is required by the recent amendments ofsection 230 and all of them are at variance with current practiceunder the Handbook as required bythe Amended Stipulation. HUD has offered no explanation for ordefense of many of the challenged downward revisions in thequality of assistance. Implementation of the proposed regulationsis plainly impermissible and would be in violation of the AmendedStipulation.

It is clear to us that what HUD sought when it went to theCongress and what it now seeks, by this attempt to modify itsagreement with the plaintiff class and its commitment to theCourt so as to exempt the TMAP regulations from the requirementsof the Amended Stipulation, is to scuttle that agreement and thecommitment embodied in the Amended Stipulation and to restricteven further the mortgage foreclosure assistance which it has soniggardly provided thereunder. If the Amended Stipulation is tobe modified in any respect, it should be tightened to eliminatethe ambiguities and the discretion which HUD has used to restrictthe mortgage foreclosure assistance program, thereby frustratingthe intention of Congress in enacting section 230.

We must confess our continuing frustration that our efforts tosecure reasonable implementation of a program agreed to by HUDwhich would further the Congressional purpose have been sorelatively unsuccessful. Despite a long, disgraceful history offootdragging, HUD now asks us to permit it an even broader rangeof discretion.

We observed in 1974 that HUD had, by its actions, in effectadministratively repealed the applicable statutes which Congresshad enacted to enable persons unable to qualify for conventionalmortgages to secure their own homes. Brown v. Lynn, supra, 385F. Supp. at 1000. Apparently, notwithstanding its agreements withthe plaintiff class and its commitments to the Court, HUD hasnever abandoned that effort. To give HUD the carte blanche whichit now seeks would, based on our experience, simply assure thatthe program would be further scuttled.

If Congress desires to repeal the program for the future, itcertainly can do so. So far as the plaintiff class of persons whoentered into contracts and mortgages on the assumption that theywould be dealt with in good faith are concerned, we feel obliged,within the limits of our authority, to assure them the reasonableopportunity to secure the homes which Congress gave to them.Granting HUD's motion clearly would be a total abrogation of thatobligation.

Nothing we have observed about the proposed TMAP regulationsand HUD's past performance should be misinterpreted as oppositionon our part to the concept of HUD's making mortgage assistancepayments in lieu of accepting an assignment of the mortgage,paying the mortgage in full currently and negotiating a reliefplan with the mortgagor. The TMAP concept is one withconsiderable merit in the appropriate case so long as itsimplementation does not derogate the intent of Congress and therights of mortgagors under the Amended Stipulation.Unfortunately, the proposed regulations do both.

CONCLUSION

Plaintiffs' motion to hold HUD in civil contempt is denied.Defendants' motion to modify the Amended Stipulation is alsodenied and defendants are enjoined from implementing the proposedregulations published at 47 Fed.Reg. 33252 (1982). An appropriateorder will enter.

1. The current regulations, which became effective in November,1976 and which continue to govern operation of the assignmentprogram, also contain the "circumstances beyond the mortgagor'scontrol" eligibility criterion. 24 C.F.R. § 203.650(5) (1982).

2. The "reasonable prospects" criterion is also contained in thecurrent regulations. 24 C.F.R. § 203.650(6) (1982).

3. HUD has included as an exhibit to its post-trial memorandum acopy of the proposed legislation which it forwarded to Congressin February 1980.

4. The House of Representatives measure provided for TMAP over an18-month period inclusive of the original period of default,unlike the enacted amendment of section 230, which provides thatassistance may initially cover 18 months in addition to thedefault period.

The House of Representatives measure, in Section 230(b)(1),provided for assignment assistance on a finding that TMAP wouldbe "impracticable" rather than, as in the enacted version,"inappropriate."

5. H.R. 7262 is identical to H.R. 2719. The bill that was reportedout of Committee was renumbered on the floor of the House.

6. Since the hearing, HUD has continued to submit monthlystatistical reports on its acceptance rates and statistics arenow available through December 1982. The rates for the periodAugust 1981 through December 1982 are: acceptances, 14.9%;referrals to mortgagee, 24.7%; and rejections, 60.5%.

7. HUD's statistical expert testified that, on his interpretationof the statistical data, the downward trend in the level ofacceptances actually began much earlier than the plaintiffs hadsurmised — in July 1980 — from which it would follow that theAugust 1981 memorandum did not precipitate a trend. See Tr. at319-20; Defendants' Exhibit # 5.

8. The statistical fluctuations on which the first of plaintiffs'contempt theories was based gave rise to allegations ofmisapplication of the assignment eligibility criteria. Thealleged failure to apply a "35% rule" in establishing paymentplans for accepted mortgagors is logically unrelated to the levelof acceptances. We speculated at the hearing that mortgagors wholearned they would be required to pay a huge fraction of theirincome to HUD may well have decided to forego HUD's offer of"assistance." (Tr. 378-79) In practice, HUD's interpretation ofits obligations — or lack thereof — with respect to formulationof payment plans may in fact be related to the decline inacceptance. No evidence was presented on this point, however.

9. HUD argues that we may avoid this inquiry. It suggests that theHouse and Senate Banking Committees' failure to invalidate theproposed regulations when they were transmitted to thoseCommittees pursuant to 42 U.S.C. § 3535(o), constituteslegislative acquiescence in the view that the proposedregulations further the intent of section 230. HUD's position ispatently without merit. See 42 U.S.C. § 3535(o)(5).

10. By contrast, in HUD's example, the February job loss mightlogically be said to have caused a May 1 default (as fixed underthe current regulations), despite the relative remoteness in timeof the latter event. We presume that, in a proper case, HUD wouldexercise its "judgment" to find the default in this situation"due to circumstances beyond the mortgagor's control."

11. In Etheridge, HUD took the position that § 203.330 of its ownregulations was inconsistent with a "Note" in Handbook ¶ 2-1(d)which reads as follows:

The current default is the only one to be considered in determining whether the mortgagor is in default due to circumstances beyond his or her control. If the record indicates that the present default was caused by some circumstance beyond the mortgagor's control, regardless of past history, this criterion is satisfied. If, however, the account was already delinquent when the qualifying circumstance first appeared, this criterion may or may not be satisfied. The mortgagor's ability to avoid the default may have been affected by the amount of the delinquency which already existed at the time the qualifying circumstance occurred; judgment must be exercised. Judgment is required also when an account, which has been chronically in default in the past, is current for one or two months and then a circumstance beyond the mortgagor's control arises and the account goes into default. Generally, if the account was current for two or more months immediately preceding the present default, the default should be considered to be a new one.

The court rejected HUD's argument that this provision of theHandbook required HUD to adopt a "two month rule" similar to theone now proposed for determining date of default.

12. Section 230(b)(3) indicates that assignment may be acceptedwithin 12 months of TMAP assistance, but only where theassignment is necessary to facilitate extension of the mortgageterm for up to 10 years.

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