Resolution Trust Corporation: Recommendations Addressed to Oversee and
Account for Cash Flow Mortgages (Letter Report, 07/26/94,
GAO/GGD-94-179).

The Resolution Trust Corporation (RTC) has implemented two of GAO's
earlier recommendations on cash flow mortgages.  In November 1992, RTC
presented new oversight procedures for cash flow mortgages to a
management conference.  RTC also has determined how it will account for
the cash flow transactions and whether any allowance for potential
future loss is required. GAO's third recommendation, that RTC make
postclosing assessments of the cash flow transactions, has been
addressed to the extent practicable.  GAO found that for the Patriot
cash flow mortgage, RTC took steps from the start to ensure that the
terms and conditions of the agreement were followed by hiring a servicer
and clearly defining its responsibilities.  However, for the first 20
months of the Centrust cash flow mortgage, RTC's oversight efforts did
not ensure that the taxpayers' interests were protected as completely as
they could have been. As of July 1993, both the Centrust and Patriot
cash flow mortgages were being serviced by the same firm.  The servicer
has developed a monitoring plan that should enable the servicer to
adequately oversee the Centrust cash flow mortgage.  However, GAO found
that neither the servicer's routine oversight practices nor the outside
accountant's annual audit would determine whether unrelated fees and
expenses had been charged to the properties' operating accounts.  After
GAO questioned these charges, the servicer developed procedures for the
auditor that include a review of these charges.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-179
     TITLE:  Resolution Trust Corporation: Recommendations Addressed to 
             Oversee and Account for Cash Flow Mortgages
      DATE:  07/26/94
   SUBJECT:  Internal controls
             Compliance
             Loan accounting systems
             Mortgage loans
             Mortgage programs
             Loan repayments
             Accounting procedures
             Savings and loan associations
IDENTIFIER:  RTC Standard Asset Management and Disposition Agreement
             
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Cover
================================================================ COVER


Report to the Honorable
Bruce F.  Vento, House of Representatives

July 1994

RESOLUTION TRUST CORPORATION -
RECOMMENDATIONS ADDRESSED TO
OVERSEE AND ACCOUNT FOR CASH FLOW
MORTGAGES

GAO/GGD-94-179

Cash Flow Mortgages


Abbreviations
=============================================================== ABBREV

  MAST - Multi-Asset Sales Transaction
  RTC - Resolution Trust Corporation
  TOA - Task Order Agreements

Letter
=============================================================== LETTER


B-256185

July 26, 1994

The Honorable Bruce F.  Vento
House of Representatives

Dear Mr.  Vento: 

On April 20, 1992, you requested that we monitor the Resolution Trust
Corporation's (RTC) cash flow mortgages.  After discussions with your
office, we agreed to assess RTC's progress in implementing the three
recommendations made in our previous report entitled Resolution Trust
Corporation Assessing Portfolio Sales Using Participating Cash Flow
Mortgages (GAO/GGD-92-33BR, Feb.  25, 1992).  In further agreement
with your office, we reviewed RTC's oversight of the Patriot and
Centrust cash flow mortgages to assess whether oversight efforts
implemented by RTC have adequately monitored and administered the
terms and conditions of these agreements. 


   BACKGROUND
------------------------------------------------------------ Letter :1

Cash flow mortgages are loans in which the interest payments to the
lender are determined by the cash flow generated from the financed
asset.  Generally, the borrower is not obligated to make payments
until a positive cash flow is generated from the asset.  In other
words, interest payments are made only from the financed asset's
operating cash flow, not from the borrower's other resources.  This
arrangement differs from more traditional financing structures in
which the borrower is obligated to make interest payments even if the
financed asset is losing money. 

Cash flow mortgages may also have a participating feature.  Under
this financial structure, the lender and the borrower share in the
asset's cash flow and sales proceeds on a predetermined basis.  If
the asset is sold or refinanced, the lender and the borrower share
the proceeds on a predetermined basis. 


      PAST RECOMMENDATIONS
---------------------------------------------------------- Letter :1.1

In our 1992 report we said that, in concept, portfolio sales using
participating cash flow mortgages could be an important disposition
strategy for RTC's least marketable real estate assets.  The use of
this strategy reflected RTC's willingness to be innovative and market
responsive.  However, portfolio sales using participating cash flow
mortgages require diligent postclosing monitoring and administration
in order to protect RTC's long-term interests.  We recommended that
RTC: 

1. develop detailed oversight procedures for loan monitoring and
administration of participating cash flow mortgages,

2. determine how it would account for the loan assets resulting from
the cash flow mortgage transactions and whether any allowance for
potential future loss is required, and

3. perform a postclosing assessment of these pilot transactions. 


      CENTRUST AND PATRIOT CASH
      FLOW MORTGAGES
---------------------------------------------------------- Letter :1.2

In 1991, as a way to attract investors, RTC began using cash flow
mortgages.  On November 7, 1991, RTC entered into a participating
cash flow mortgage financing arrangement with Winthrop Financial
Associates in connection with the sale of the Centrust Tower in
Miami, FL.  Under the Centrust cash flow mortgage, RTC received a
note for $36.8 million.  As of February 28, 1994, the balance owed
RTC was $36.8 million plus $6.9 million dollars in accrued
interest.\1

On January 1, 1992, RTC entered into a participating cash flow
mortgage financing arrangement with Citation Mortgage Limited for the
sale of 26 congregate care and assisted living properties\2 located
in 12 states.  For this sale, RTC received a note for $85 million. 
Citation Mortgage Limited prepaid the mortgage in full on February
22, 1993, and satisfied its obligation to RTC.  As a result, RTC's
responsibilities and interests in these assets were terminated. 

On August 2, 1991, RTC entered into a participating cash flow
mortgage financing arrangement with the Patriot group for the sale of
properties in its inventory of which Patriot bought 25 properties--1
hotel and 24 office buildings.  On August 21, 1992, 4 of these
properties were purchased by Patriot, and on December 7, 1992, 21
more properties were purchased.  Under the Patriot cash flow
mortgage, RTC received notes for $109.1 million for the properties
purchased.  As of February 28, 1994, the balances owed RTC equalled
$104.8 million. 

For the Centrust and Patriot participating cash flow mortgages, RTC's
return depends to a great extent on how well the properties are
managed and whether the mortgage terms and conditions are strictly
followed.  To help protect its interests, RTC hired servicers to
monitor and administer the borrower's management of the assets.  The
servicers are also responsible for making sure that payments are made
to the appropriate accounts and that RTC receives its agreed-upon
share of the cash flows.  Servicers for RTC's participating cash flow
mortgages are to take steps to ensure that all terms of the
agreements are met and properties are managed pursuant to the loan
documents.  The servicers are to act on RTC's behalf in approving
actions and making decisions that protect RTC's interests.  Appendix
I provides specific information on each asset included in the
mortgages. 


--------------------
\1 As of February 28, 1994, Winthrop had made two interest payments
in this transaction.  On July 29, 1993, Winthrop paid $89,046 and on
November 1, 1993, they paid $293,779 for a total of $382,825. 

\2 Congregate care and assisted living properties are multiunit
housing facilities for the elderly, characterized by an array of
common services, such as housekeeping, daily communal meals,
transportation, organized activities, and security, but generally not
health care. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

RTC has implemented two of the three recommendations made in our
previous report on cash flow mortgages.  RTC has implemented the
third recommendation to the extent practicable. 

In November 1992, RTC implemented oversight procedures for cash flow
mortgages as recommended by presenting the instructions for use of
the new procedures at a conference of RTC oversight managers and
contracting and legal division representatives.  RTC also has
implemented the second recommendation from our 1992 report by
determining how it will account for the cash flow transactions and
whether any allowance for potential future loss is required. 

The third recommendation from our 1992 report, that RTC make
postclosing assessments of the cash flow transactions, has been
addressed to the extent practicable.  A postclosing assessment of the
Congregate Care cash flow mortgage was completed shortly after the
buyer satisfied its obligation to RTC.  RTC has not completed
postclosing assessments of Centrust and Patriot because RTC officials
determined that these transactions cannot be accurately assessed
until they are completed. 

We reviewed RTC's efforts to oversee the Patriot and Centrust cash
flow mortgages.  Both of these cash flow mortgages began operating
before RTC implemented its oversight procedures.  For the Patriot
mortgage, RTC took steps from the beginning to help ensure that the
terms and conditions of the agreement were followed by hiring a
servicer and clearly defining its responsibilities.  Later, RTC
transferred the Patriot mortgage servicing responsibilities to a
national servicer.  However, for the first 20 months of the Centrust
mortgage, RTC's oversight efforts did not ensure that the taxpayer's
interests were protected as completely as they could have been. 

As of July 1993, both the Centrust and Patriot cash flow mortgages
were being serviced by the same firm.  Overall, we found that this
servicer was taking the required steps to determine if the borrowers
complied with the terms and conditions of the Patriot cash flow
mortgage.  In addition, this servicer had developed a similar
monitoring plan for the Centrust cash flow mortgage.  We believe that
this plan, if properly implemented, should enable the servicer to
provide adequate oversight of the Centrust mortgage. 

However, we found that neither the servicer's routine oversight
practices nor the outside accountant's annual audit would determine
whether unrelated fees and expenses had been charged to the
properties' operating accounts.  After we questioned these charges,
the servicer developed procedures for the auditor that include a
review of these charges.  Such procedures are needed to verify that
unrelated charges are not being passed on as expenses to the
properties. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

Our objectives were to determine whether RTC had implemented the
recommendations from our previous report concerning participating
cash flow mortgages and to assess whether oversight efforts
implemented by RTC would be adequate to monitor and administer the
terms and conditions of the Centrust and Patriot agreements.  We
excluded the Congregate Care transaction from our review because
RTC's responsibilities and interests in those assets were terminated
in February 1993, when Citation Mortgage Limited fully paid the
mortgage. 

We reviewed RTC policies and procedures to determine whether it had
(1) developed detailed oversight procedures for loan monitoring and
administration, (2) centralized oversight responsibility, and (3)
implemented an oversight process.  We had recommended that these
actions be taken in our previous report (GAO/GGD-92-33BR, Feb.  25,
1992).  We interviewed headquarters officials in RTC's Division of
Asset Management and Sales in Washington, D.C., officials in RTC's
National Sales Center in Washington, D.C., and regional RTC officials
in Dallas and Atlanta to discuss their roles in developing and
implementing the oversight procedures.  We also interviewed the
national servicer currently in charge of the cash flow mortgages and
the interim servicer for the Centrust mortgage. 

We reviewed RTC's methods of accounting for loans that arise from the
transactions and determined whether any allowance for potential
future loss is required.  We interviewed responsible RTC officials to
determine if RTC had performed a postclosing assessment of the
transactions. 

We obtained and analyzed documents, such as servicing agreements,
loan documents, and internal memos, and discussed the monitoring and
administration efforts with responsible RTC officials.  We obtained
and reviewed property reports prepared by the servicers to see how
they were performing the property inspection and oversight duties
necessary for these mortgages. 

We reviewed the quarterly reports prepared by the debtors for RTC to
check the reported performance and cash flow of the Patriot
properties.  As part of our review we examined quarterly budget
variance reports for each property.  Furthermore, we assessed RTC's
efforts to oversee the servicers by (1) reviewing the servicers'
reports and subsequent follow-up actions taken by RTC and (2)
verifying whether RTC had completed reviews of the servicers.  We
also interviewed RTC officials responsible for overseeing the
servicers. 

We did our work from February 1993 through February 1994 in
accordance with generally accepted government auditing standards. 

In May 1994, RTC provided written comments on a draft of this report. 
These comments are addressed on pages 15 and 16.  We reprinted RTC's
comments in appendix II. 


   RTC ESTABLISHED A PROGRAM FOR
   MONITORING AND ADMINISTERING
   CASH FLOW MORTGAGES
------------------------------------------------------------ Letter :4

On November 6, 1992, in response to our recommendation, RTC
established task order procedures for hiring servicers to administer
and monitor multi-asset, seller-financed transactions, including cash
flow mortgages.  On November 10, 1992, RTC presented the Multi-Asset
Sales Transaction (MAST) National Servicer Task Order Procedures to
the RTC field office oversight managers and contracting and legal
department representatives responsible for the implementation of the
program.  Under these procedures, to determine if a borrower complies
with the terms and conditions of its seller-financed transactions,
RTC hires firms that have been prequalified, known as RTC's national
servicers, to monitor and administer the borrowers' actions and
decisions. 

MAST is designed like other RTC Task Ordering Agreements (TOA) and
may be used when the same services are needed on a recurring basis.\3
Its purpose is to expedite future contracting actions by performing
the initial steps in the contractor selection process before a
particular service is needed.  Under TOA procedures, RTC begins the
process by issuing a general description of the services it
anticipates needing and solicits proposals from interested
contractors.  RTC evaluates the proposals and selects qualified
contractors to form a pool.  When services are needed, RTC provides a
pool of preapproved contractors with information about the assignment
and solicits proposals from them.  RTC evaluates the proposals,
selects a contractor, and awards a task order contract.  The TOA and
the signed task order contract together constitute the contract. 

From May 22, 1992, to September 15, 1992, RTC competitively solicited
and preapproved a group of seven firms to service the cash flow
mortgages based on technical qualifications.  These firms are known
as RTC's national servicers.  Subsequently, for each task order
request, RTC is to solicit technical proposals and cost estimates
from its national servicers and then select one of them primarily on
the basis of its ability to service the loan requirements as
completely as possible at the lowest price. 

National servicers are responsible for specific seller-financed loans
or cash flow mortgages via task orders.  As part of the MAST
procedures, RTC established a standard task order that is modified to
fulfill the specific needs of each seller-financed loan or cash flow
mortgage.  The task order states that the servicer will "Provide full
loan servicing pursuant to the loan documents, the agreement and this
task order." Loan servicers' duties generally include collecting and
remitting loan payments from borrowers, maintaining escrow accounts
for real estate taxes and hazard insurance, and, if necessary,
foreclosure of and repossession of the collateral on defaulted loans
if directed to do so by RTC. 

The task order includes a summary of the servicer's responsibilities
that identifies the requirements of the cash flow mortgage and the
actions that the servicer must take to ensure that the requirements
are fulfilled.  For example, the task order requires the servicer to
review the loan documents and provide RTC with schedules of
obligations required to be satisfied by the borrower and lender under
the applicable loan documents.  The task order identifies other
actions the servicer must take to fulfill its role in making sure the
borrower complies with the loan documents. 

An RTC field office representative had been designated to oversee the
national servicer assigned to each of the cash flow mortgages we
reviewed.  These representatives were responsible for oversight of
the servicer, including making evaluations of the servicer's
performance under its contract by completing on-site reviews,
reviewing reports from the servicer, and contacting the servicer on a
regular basis regarding the borrower's compliance with the loan
documents. 


--------------------
\3 RTC defines a TOA as a written instrument of understanding
containing (1) terms applying to future task order contracts; (2) a
general description of the services that may be needed; and (3) the
methods for pricing, issuing, and delivering task order contracts
under a TOA. 


   RTC HAS DETERMINED HOW IT WILL
   ACCOUNT FOR THE CASH FLOW
   MORTGAGES
------------------------------------------------------------ Letter :5

In our 1992 report, we also recommended that RTC determine how it
will account for the loan assets received as a result of the cash
flow mortgage transactions and whether any allowance for potential
future loss is required.  RTC has determined how to account for the
loan assets resulting from the cash flow mortgage transaction.  In a
1993 report, we said that RTC's methodology for producing recovery
estimates was reasonable.\4 RTC has reasonably estimated an allowance
for future loss as a result of these transactions.  RTC is also
accounting for potential future losses. 

Generally, RTC accounts for its cash flow mortgage loans in the same
way it accounts for its other seller-financed loans.  RTC removed the
sold real estate asset from its receivership books.  RTC then
recorded the new loan that resulted from the cash flow mortgage
transaction.  RTC estimates future losses during the quarterly
process of estimating cash recoveries for receivership assets. 
During our audit of financial statements, we determined that RTC's
methodology for producing recovery estimates was reasonable.\5


--------------------
\4 Financial Audit:  Resolution Trust Corporation's 1992 and 1991
Financial Statements (GAO/AIMD-93-6, June 30, 1993). 

\5 GAO/AIMD-93-6, June 30, 1993. 


   POSTCLOSING ASSESSMENTS SHOULD
   BE DONE WHEN THE CENTRUST AND
   PATRIOT CASH FLOW MORTGAGES ARE
   COMPLETED
------------------------------------------------------------ Letter :6

Our 1992 report also recommended that RTC make postclosing
assessments of the cash flow mortgages.  This recommendation has been
addressed to the extent practicable.  A postclosing assessment of the
Congregate Care cash flow mortgage was completed after the buyer
prepaid the mortgage and satisfied its obligation to RTC.  RTC found
that the RTC financing provided in the transaction substantially
improved RTC's collections.  According to RTC, its actual collections
were about $28 million higher using cash flow mortgage financing than
accepting the cash equivalent bid value. 

RTC program officials also said that assessments of the Patriot and
Centrust cash flow mortgages had not been done because such
assessments would not be meaningful until these transactions have
been completed.  Furthermore, RTC does not believe postclosing
assessments are currently necessary because the Patriot and Centrust
cash flow mortgages are likely to be the last such mortgages. 
According to RTC officials, this financing structure required
aggressive monitoring and administration to ensure that RTC's
interests were protected.  In addition, RTC found that because the
real estate markets had improved it was no longer necessary to use
this type of transaction to attract buyers for its real estate
assets.  However, should market conditions deteriorate, RTC may
consider using cash flow mortgages in future disposition strategies. 

We agree with RTC and believe that postclosing assessments would not
be valid at this point.  Postclosing assessments based on partial
information could provide misleading assessments of the transactions. 
However, assessments based on complete information could be
beneficial to RTC or its successor should it plan to use cash flow
mortgages as part of its disposition strategy.  We and RTC believe
that assessments should be done when the transactions are completed. 


   RTC AND ITS SERVICERS HAVE
   ADHERED TO RTC OVERSIGHT
   PROCEDURES FOR THE PATRIOT CASH
   FLOW MORTGAGE
------------------------------------------------------------ Letter :7

From June to December 1992, an interim servicer was responsible for
the administration and monitoring of the Patriot cash flow mortgage. 
During that time, only 4 of the 25 properties in this transaction
were purchased by Patriot.  RTC provided a statement of work to the
interim servicer that identified the requirements of the loan
documents and summarized the servicer's responsibilities. 

On December 17, 1992, 10 days after the December 7, 1992, closing
date for the remaining 21 properties in the Patriot transaction, RTC,
using the November 1992 MAST task order agreement procedures,
transferred the servicing responsibilities to one of its national
servicers.  RTC also provided this servicer with a complete statement
of work that outlined its responsibilities for the Patriot cash flow
mortgage.  As of June 30, 1993, this servicer had visited 19 of the
25 Patriot properties to verify that repairs and improvements were
made and to make an overall assessment of the property. 

The servicer had also reviewed related invoices, advised the borrower
regarding leasing decisions, and completed required reports for
review by the RTC regional representative.  Furthermore, the servicer
developed additional reports to help RTC oversee the borrowers'
compliance with the agreement.  For example, the servicer developed a
report that included a summary of the payments on the note by the
borrower; a schedule of compliance with key steps in the
transactions, such as the preparation of operating budgets; an
occupancy summary for all properties; and a schedule of payments of
real estate taxes by the borrower. 

Additionally, RTC has taken steps to oversee the servicer.  RTC
representatives told us that they communicate with the servicer at
least once a week to get an update on the management of the
properties.  The servicer confirmed regular talks with RTC officials
regarding the Patriot mortgage.  In November 1993, RTC completed its
on-site review of this servicer.  A summary of the results of this
review was issued on December 7, 1993, and according to this document
the servicer was doing a very good job performing under the
requirements of the Patriot servicing contract. 


   OVERSIGHT OF THE CENTRUST CASH
   FLOW MORTGAGE WAS DEFICIENT
------------------------------------------------------------ Letter :8

RTC's oversight efforts over the Centrust cash flow mortgage did not
ensure that the taxpayer's interests were protected as completely as
they could have been.  Specifically, RTC did not (1) document whether
it serviced the mortgage, (2) hire an interim servicer that could
fulfill all necessary duties beyond routine servicing and cash
collections, (3) provide this servicer with all the information
needed to service the mortgage, and (4) adequately define the
servicer's responsibilities to encompass its duties beyond the
standard servicer agreement scope of work.\6 RTC recognized the
limitations of the standard servicing agreement and amended the
standard servicing agreement three times.  However, the amendments to
the standard servicing agreement did not ensure that all the
requirements of the Centrust cash flow mortgage could be performed by
the interim servicer.  As RTC concedes, the servicing requirements of
the Centrust cash flow mortgage "far exceeded the scope of work" in
the interim servicer's existing contract.  As a result, we do not
believe that the amendments were sufficient to ensure that the
taxpayer's interests were fully protected. 

Although RTC was to immediately provide in-house servicing, for the
first 5 months after the Centrust mortgage was signed, November 7,
1991, to April 8, 1992, RTC officials could not provide any evidence
that they had performed servicing duties.  RTC transferred this
mortgage to an interim servicer at the end of the first 5 months. 

RTC transferred the Centrust cash flow mortgage to an interim
servicer that was also servicing other, less complex RTC
seller-financed loans on April 8, 1992.  However, according to the
servicer, RTC did not provide the complete loan documents needed to
service the loan until 4 months later in mid-August.  Although RTC
provided this servicer with a standard servicing agreement, it was
not adequate to ensure that the complex requirements of the Centrust
transaction were fully serviced.  Subsequently, in November 1992, RTC
gave the servicer a statement of work that included a detailed
summary of the servicer's responsibilities describing its
responsibilities for fully servicing the Centrust cash flow mortgage. 
This was about 1 year after the transaction was completed, 7 months
after transferring the loan to the servicer, and the same month the
MAST procedures were implemented. 

Before receiving this detailed summary of responsibilities, the
servicer did not know what RTC expected it to monitor and administer. 
As a result, from April 1992 to November 1992, the servicer, in
compliance with its existing contract, serviced the Centrust cash
flow mortgage like other RTC seller-financed loans.  RTC incurred an
unnecessary risk by not providing a clear and detailed definition of
responsibilities for servicing the Centrust cash flow mortgage before
engaging a servicer. 

In November 1992, shortly after RTC provided the servicer with a
summary detailing the servicing requirements for the Centrust cash
flow mortgage, the servicer informed RTC that there were some
requirements that, in the servicer's view, could not be accomplished
from a practical perspective, and others that exceeded the servicer's
duties in a "typical" servicing role.  The servicer informed RTC that
under the current contract conditions the servicer would be unable to
perform several of the duties from a practical perspective. 

Specifically, in a letter to RTC the servicer wrote that, among other
requirements, it would be impractical for it to try to (1) monitor
for the occurrence of capital events, (2) avoid actions or omissions
that could result in the business relationship being considered a
partnership, (3) monitor restoration work undertaken by the debtor,
(4) investigate CPA firms hired by the debtor, (5) monitor compliance
by the debtor with environmental laws, and (6) verify that the debtor
has engaged a qualified architect or qualified engineer for
improvements on the property. 

The servicer said to us that the compensation level for the servicing
contract was well below what would have been necessary for the
servicer to actually service the contract as the summary of
servicer's responsibilities described.  When we asked the servicer
how the issues raised were resolved, the servicer told us that these
issues were not resolved until the national servicer took control of
servicing for the loan.  These issues were addressed under the
solicitation for a new servicer. 

An RTC official acknowledged to us in a June 21, 1993, letter that
the servicing requirements of the Centrust cash flow mortgage "far
exceeded the scope of work" in the interim servicer's existing
contract.  According to an RTC official, this servicer was selected
on an interim basis until the MAST oversight procedures were
finalized and a national servicer could be engaged.  RTC's MAST
procedures were completed in November 1992. 

It was not until July 22, 1993, almost 9 months after the MAST
procedures were developed, that RTC hired a national servicer for the
Centrust cash flow mortgage.  From November 1991 until July
1993--about 20 months--the Centrust cash flow mortgage was not being
adequately serviced. 

A national servicer was not hired to service the Centrust cash flow
mortgage until July 1993 because RTC believed that, given the lack of
cash remittances due to RTC under the terms of the loan documents,
the risk in underservicing this mortgage before the national servicer
was engaged was minimal.  According to RTC, under the terms of the
mortgage, payments were not required to be made to RTC until the
Centrust asset generated 3 consecutive months of profitability. 
According to RTC, since sustained profitability was unlikely given
the low demand for office space in the Miami area at that time, and
no payments were expected, the risk associated with this servicing
arrangement was minimal.  We neither determined the level of risk nor
reviewed the payment history or other related documents for the
Centrust mortgage because at the time of our review the RTC Inspector
General was performing an audit of the transaction. 

Furthermore, the national servicer could not immediately begin
servicing the mortgage.  The servicer had to become familiar with the
borrower's requirements.  This meant that the servicer, after being
hired, had to make the initial contacts with the borrower and get the
necessary documentation to service the mortgage.  On August 12, 1993,
the servicer met with the borrower to discuss the mortgage
requirements and initiate their relationship.  On September 16, 1993,
the servicer sent a letter to the borrower reviewing the open items
discussed in the August 12, 1993, meeting.  This letter marks the
servicer's first documented follow-up of the borrower's actions to
make sure that the requirements of the mortgage were followed. 

The new servicer for Centrust is also servicing the Patriot cash flow
mortgage.  Our review found that the servicer had developed a
monitoring plan for Centrust that is similar to the one used for
Patriot.  However, at the time of our review the servicer had not had
time to fully implement this plan.  If the servicer fully implements
this plan, we believe the oversight of the Centrust mortgage should
be adequate. 


--------------------
\6 The standard servicing agreement used in the Centrust transaction
specified that the servicer would provide loan administration
services, collection of payments for the reduction of principal and
application of interest, certain foreclosures and repossession
services, collection personnel, escrow administration, and remittance
of collected payments to RTC. 


   ROUTINE MONITORING AND
   ADMINISTRATION PRACTICES MAY
   NOT DETECT UNRELATED CHARGES
------------------------------------------------------------ Letter :9

The MAST oversight procedures establish mechanisms to monitor
compliance with respect to the operation of the properties and the
administration of cash flow mortgages.  However, the servicer's
routine monitoring and administration practices may not detect
charges to the properties' operating accounts for fees and expenses
not directly related to the administration of the financed
properties.  RTC officials agreed that such unrelated charges could
go undetected.  According to RTC officials, under the terms of the
MAST agreement, they expect the servicer to review charges in order
to minimize this problem. 

Both the Patriot and Centrust cash flow mortgage documents provide
that the borrower will be reimbursed for operating expenses directly
related to the financed properties by charging these costs to the
properties' operating accounts.  The loan agreements state that the
operating expenses shall be for only normal, reasonable, and
customary fees, costs, and expenses in connection with the operation,
management, leasing, security, and/or repair of the mortgaged
property. 

We determined that the borrower charged the Patriot properties'
operating accounts for fees and expenses that may not have been
directly related to the administration of the properties.  On the
basis of our review of the variance reports in the quarterly report,
we found that fees and costs for indirect expenses, such as
professional association memberships, advertising, stationery,
consultants, and acquisition-related matters, were charged to the
properties' operating accounts.  Because these costs and fees are
used to support the buyer's overall operations, they should not be
charged to the operating accounts.  Under the terms of the agreement
the buyer can charge RTC no more than a 5 percent management fee. 
Therefore, when any of these fees are instead charged to the
operating accounts the buyer is not complying with the terms of the
agreement. 

Additionally, we identified costs related to legal expenses
associated with purchasing some of the properties that were charged
to the operating accounts.  For example, according to the master
agreement of sale of the Patriot properties, RTC and Patriot were
responsible for paying their own legal fees with respect to each
closing.  We brought these issues to RTC representatives who told us
that the servicer would be addressing our concerns for both Patriot
and Centrust. 

The servicer said that it monitored all charges to the properties'
operating accounts for reasonableness.  The servicer said that some
charges, particularly the membership fees, were acceptable as fringe
benefits.  However, the servicer depended on the auditor to check
these charges to see if they were directly related to the operation
of the property.  The servicer said that it was aware that it was
possible for costs that were not directly related to be passed on to
RTC, but it believed that an audit would detect such inappropriate
operating expenses during the annual audits required by the cash flow
mortgage agreement. 

However, the terms of the audit engagement do not require the
auditors to verify whether charges are within the terms of the loan
agreement.  Generally, the auditors are only required to determine
whether receipts or invoices match the amounts charged to the
operating accounts.  As a result, charges that may not be within the
terms of the agreement may not be identified during these audits. 

Since neither the servicer's routine oversight practices nor the
outside accountant's annual audits include reviews to determine if
all charges are related to the properties' operations, we believe it
is important that the servicer verify these charges and ensure that
they are directly related to the operation of the property and in
accordance with the mortgage agreements.  While the unrelated charges
identified in the variance reports for the properties in one
quarterly report that we examined equalled only .02 percent of the
$109.1 million value of the mortgage and 1.36 percent of the $1.8
million quarterly operating expenses, these charges could be passed
on several times each year and, therefore, reduce the return to RTC. 

After we questioned these charges, RTC said the servicer developed
procedures for the auditor that include a review of these charges to
ensure that unrelated charges are not passed on as expenses to the
properties, affecting the return to RTC.  RTC officials said that the
servicer will require the auditors to follow these procedures during
the 1994 audit of Patriot and Centrust. 


   CONCLUSIONS
----------------------------------------------------------- Letter :10

RTC has implemented two of the three recommendations we made in our
1992 report.  In response to our first recommendation, RTC
established oversight procedures that should enable it to verify
whether borrowers complied with the terms and conditions of cash flow
mortgage agreements.  Under these procedures, RTC is to contract with
qualified national servicers to monitor and administer the loans,
provide these servicers with complete statements of work, and oversee
the servicers via regular reports, discussions, and on-site reviews. 
In response to the second recommendation, RTC has determined how it
will account for the cash flow mortgage loans and potential future
losses. 

The third recommendation from our 1992 report, that RTC make a
postclosing assessment of the cash flow mortgage transactions, has
been addressed to the extent practicable.  A postclosing assessment
of the Congregate Care cash flow mortgage was completed.  However,
RTC has not assessed the Patriot and Centrust cash flow mortgages. 
RTC program officials said that assessments of the Patriot and
Centrust cash flow mortgages had not been done because such
assessments would not be meaningful until these transactions have
been completed.  We agree with RTC and believe that postclosing
assessments would not be valid at this point.  Postclosing
assessments based on partial information could provide misleading
assessments of the transactions.  However, assessments based on
complete information could be beneficial to RTC or its successor
should it plan to use cash flow mortgages as part of its disposition
strategy. 

RTC's oversight efforts for the Patriot and Centrust cash flow
mortgages differed greatly.  For the Patriot mortgage, RTC ensured
that the terms and conditions of the agreement were met by
contracting with an interim servicer and defining its duties.  The
servicing of this contract was later transferred to a national
servicer after the sale was completed.  In contrast, for the first 20
months of the Centrust mortgage, RTC did not ensure that the terms
and conditions of the agreement were met.  RTC failed to provide
immediate servicing to the mortgage.  When RTC engaged a servicer,
the service requirements of the cash flow mortgage servicer "far
exceeded the scope of work" in the servicer's existing contract.  In
addition, RTC failed to provide adequate definition of the servicer's
role.  Finally, it was not until about 20 months after the Centrust
cash flow mortgage sale was completed that RTC contracted with a
national servicer that was fully capable of monitoring and
administering this mortgage.  As a result, RTC could not be certain
that the borrower was complying with the terms and conditions of the
agreement for about a 20-month period. 

We found that the national servicer hired using the MAST procedures
was taking the necessary steps to determine if the borrowers complied
with the terms and conditions of the Patriot cash flow mortgage.  We
also found that this servicer plans to use similar steps to monitor
the Centrust cash flow mortgage, and we believe these steps, if
properly implemented, should be adequate to service this mortgage. 

However, neither the servicer's routine monitoring and administrative
practices nor the auditors' annual audits included reviews to detect
unrelated charges made to the properties' operating accounts.  RTC
said the servicer has now established oversight procedures for the
auditors to follow during the 1994 audit cycle of the Patriot and
Centrust cash flow mortgages to address this problem.  Although such
unrelated charges individually may not represent large amounts of
money, we are concerned that these charges, over the lives of these
mortgages, could add up and reduce the overall return to RTC.  It is
important that the servicer implement procedures to verify the fees
charged to the properties' operating accounts. 


   RECOMMENDATION
----------------------------------------------------------- Letter :11

We recommend that RTC's Deputy and Acting Chief Executive Officer
direct RTC servicing oversight personnel to require RTC's cash flow
mortgage servicer to implement procedures requiring that the annual
audits of cash flow mortgages include verification of the charges to
the properties' operating accounts throughout the life of the
mortgages. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :12

In commenting on a draft of this report, RTC agreed with our
recommendation.  In response to our recommendation, RTC said that the
servicer has developed procedures to ensure that unrelated charges
are not passed on as expenses to RTC.  According to RTC, the auditors
will follow these procedures during the 1994 audit cycle. 

RTC also agreed with all of our findings except one.  RTC said that
the interim servicing agreement for the Centrust note included a very
detailed scope of work that provided for an acceptable level of
servicing, in its opinion, and ensured that any payments due under
the terms of the Centrust loan documents would be received and
properly applied to the appropriate accounts.  We disagree.  The
contract terms under which the interim servicer was hired did not
provide an acceptable level of servicing. 

As discussed on pages 9 to 12 of the report, cash flow mortgages like
the Centrust note require a much higher degree of servicing than
provided by a standard servicing agreement.  This servicing must
ensure that all the terms and conditions in the mortgage agreements
are monitored because these terms and conditions affect the cash flow
generated by the asset and, therefore, RTC's return.  For example, if
the servicer did not monitor restoration work performed by the
purchaser, RTC would not know if the property was being restored
properly.  The standard servicing agreement used for the interim
servicing of the Centrust note did not provide for such monitoring. 
The servicer needed to monitor these expenditures to ensure that the
necessary work was being done and reasonable prices were being
charged for these services.  Further, as stated in the report, the
servicer acknowledged that it did not and could not monitor all the
terms and conditions of the mortgage.  Currently, the Centrust cash
flow mortgage is under a servicing agreement that should enable RTC
to ensure that adequate oversight is maintained. 


--------------------------------------------------------- Letter :12.1

As agreed with you, unless you publicly release its contents earlier,
we plan no further distribution of this report until 30 days from the
date of this letter.  At that time, we will send copies of this
report to other interested congressional members and committees, the
Deputy and Acting Chief Executive Officer of RTC, and the Chairman of
the Thrift Depositor Protection Oversight Board.  We will also make
copies available to others upon request. 

The major contributors to this report are listed in appendix III. 
Please contact me on (202) 736-0479 if you or your staff have any
questions concerning this report. 

Sincerely yours,

Gaston L.  Gianni, Jr.
Associate Director, Government
 Business Operations Issues


PATRIOT AND CENTRUST CASH FLOW
MORTGAGE PROPERTIES AS OF 10/21/93
=========================================================== Appendix I

                        (All monetary values in millions)

Cash
flow      Type              Book  Appraisa    Appraisal/      Sale   Sale price/
mortgage  property         value         l    book value     price     appraisal
--------  ------------  --------  --------  ------------  --------  ------------
Patriot   Office
 American  Buildings
          Bexar Office     $25.1     $13.0           52%      $8.6           66%
           Tower
          5255 Katy         10.4       3.9            38       3.0            77
           Freeway
          3100              20.1      11.3            56       7.0            62
           Monticello
           Office
           Building
          Memorial           9.4       9.3            99       6.7            72
           Office
           Building
          Town and          17.9       5.4            30       4.5            83
           Country
           Central
          1717 St.          21.5       5.2            24       2.9            56
           James Place
           and 1770
           St. James
           Place
          7700 San           8.7       5.5            63       3.5            64
           Felipe
           Office
          Cornerstone        2.1       1.3            62       1.0            77
           Regency
          Metroport          8.6       4.7            55       4.9           104
          Preston           15.7       5.3            34       4.1            77
           Center
           Office
          Republic          10.3       3.6            35       2.4            67
           Place
          Santa Fe           7.8       1.3            17       1.1            85
           Plaza
           Office
          Landmark           7.0       2.9            41       2.3            79
           Bank Center
          Commerce          30.7       6.8            22       4.6            68
           Plaza
          Century            9.7       4.4            45       3.3            75
           Building
          Atrium at          1.5       1.5           100        .5            33
           Coulter
           Ridge
          Brandeis           7.5       5.6            75       6.2           111
           Building
          Phelan            36.8      29.5            80      20.8            71
           Building
          Western           36.0       6.5            18       7.0           108
           Savings
           Building
          Westage           10.8      11.5           106       7.7            67
           Business
           Center
          Silver             6.0       4.1            68       4.4           107
           Square
          Beardsley          8.2       4.0            49       2.6            65
           Corporate
           Center
          Century III        5.4       6.6           122       5.3            80
           Building

Hotel
--------------------------------------------------------------------------------
Patriot   Bourbon           11.0      14.3           130      11.0            77
 American  Orleans
           Hotel
================================================================================
          Totals            $328      $167           51%    $125.4           75%

Centrust Office Building
--------------------------------------------------------------------------------
          Centrust        $166.4       $70           42%       $44           63%
           Tower
--------------------------------------------------------------------------------



(See figure in printed edition.)Appendix II
COMMENTS FROM THE RESOLUTION TRUST
CORPORATION
=========================================================== Appendix I



(See figure in printed edition.)

See comment 1. 

See comment 2. 

See comment 3. 

See p.  16. 

See comment 4. 

See comment 5. 



(See figure in printed edition.)


The following are GAO's comments on the Resolution Trust
Corporation's May 18, 1994, letter. 


   GAO'S COMMENTS
--------------------------------------------------------- Appendix I:1

1. We did not determine the relative strengths and weaknesses of all
possible servicers of the cash flow mortgages, and we cannot confirm
RTC's assertion that the current servicer of the cash flow mortgages
is one of the nation's premier servicers. 

2. While RTC states that it actively solicited servicers for both
cash flow mortgages after MAST was established, RTC was far more
successful in obtaining a servicer for the Patriot cash flow mortgage
than it was with the Centrust cash flow mortgage.  While it took RTC
only 10 days after the December 7, 1992, closing date of the Patriot
cash flow mortgage to have a MAST servicer under contract, it took
RTC almost 9 months from the time MAST was established to engage a
servicer for the Centrust cash flow mortgage.  As we stated in our
report, we do not believe that the Centrust cash flow mortgage was
adequately serviced during the time previous to the July 1993
engagement of the MAST servicer for Centrust.  This delay increased
the amount of time in which the contract was not being adequately
serviced. 

3. While we recognize that RTC made changes to amend the servicing
coverage of the Centrust cash flow mortgage, we did not say that RTC
provided the best servicing available to RTC in its oversight of the
Centrust cash flow mortgage.  As previously stated, it took RTC
almost 9 months, from the time MAST was established, to engage a
national servicer for the Centrust cash flow mortgage. 

4. We did not say that RTC interests are now, and will continue to
be, protected to the fullest extent possible under the loan
documents.  Instead, we said that a national servicer was adequately
servicing Patriot and developed a similar plan to service Centrust. 
We also said that if the servicer fully implements the plan, Centrust
should be adequately serviced. 

5. The report was modified to reflect RTC's response. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Carolyn M.  Taylor, Assistant Director, Government Business
Operations
 Issues
Eugene M.  Smith, Program Review Analyst
Philip J.  Mistretta, Senior Evaluator
Abiud A.  Amaro, Evaluator-in-Charge
Abe Logan, Evaluator
Thelma A.  Jones, Writer-Editor
Nellie P.  Shamlin, Administrative Support

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Jeannette Franzel, Audit Manager

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

Susan Linder, Senior Attorney
