oversight

Review of Frontier Heights Housing Project, Snohomish County, Washington

Published by the Government Accountability Office on 1971-04-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                 COMPTROLILEW           GENERAL       QF    THE       UNITED    STATES

                                                      WA?3-lINGTON.    DC         2Q946




B-171630



Dear Mr, Meeds:

       In accordance with your~e-q~est            of December 21, 1970, the General
Accounting      Office has made a review of six specific            areas relating    to the
Frontier     Heights housing project         in Snohomish County, Vashington,         These
areas are construction           costs; financing      arrangements  and costs; material
specifications;        builderIs    performance     with respect to guidelines      and
specifications        of the Federal Housing Administration           (FHA), Department of
Housing and Urban Development;             FHA and Snohomish County inspection        pro-
cedures; and FHA follow-up            procedures    for discharging    buyersl   complaints,

       The     results      qf      our     review,          which     are         summarized            below4   are   presented
in detail  in the appropriate     sections of the accompanying report                                                    that
supplements our interim     report to you dated February 5, 1971,

       Frontier   Heights was one of the initial      pilot projects                                              developed under
the FHA-sponsored Cost-Effective         Home Ownership and Improved                                                Contemporary
Environment     (CHOICE) program which was intended to increase                                                   the supply of
homes for families       of modest incomes through economical land                                                  development
and simplified     housing construction.

       Our analysis of the construction    cost of the 203 housing units com-
pleted as of January 1971 showed that the unit cost averaged $15,855 per
house in division   1, $16,285 in division     2, and $16,128 in division     3,
The average selling   prices for the 135 houses sol.d in the three divisions
were $16,347, $16,741, and $18,081, respectively.        The builder's    average
profit   on the 135 houses was about $560, which is within the profit         guide-
Pines established   by FHA for this project,

        FIG!. insured      the mortgage loans on all Frontier       Heights houses sold as
of   January       1971 o   Mortgage loan financing    was provided     by two Seattle,
Washington,         lending institutions,       One of these lenders also provided
financing        to the builder      of the project,   The average closing costs for
buyers of        Frontier     Heights houses was $460, The average selling         costs for
the builder         ranged from $1,846 for houses in division          i to $2,224 for houses
in division         3,
B-171630



       The Corps of Engineers,    which assisted us in the inspection        of
Frontier    Heights houses and in the evaluation   of material     specifications
and builder's     performance, found no evidence that materials      used in
Frontier    Heights houses did not meet M-approved     specifications        for the
project.

      The Corps found that the housing     designs and land development       plans
for Frontier    Heights were prepared generally    in accordance with the guide-
lines established      by FHA and Snohomish County and that most of the home-
owners I complaints     were the result of poor workmanship,       The Corps con-
cluded, however, that the houses generally       were structurally     adequate,

       The Frontier     Heights houses were inspected at various     stages of
construction     by E'HA, the county, the State, and the lending institution
which provided      financing   to the builder,    Our examination of certain
reports    of these inspections      showed that the construction  work had been
performed    to the satisfaction      of the inspectors,

        FHA regulations    require    the builder     or seller of newly constructed
houses, such as those at Frontier            Heights,    to give home buyers who have
FE&insured      mortgage loans l-year warranties           that the houses have been
constructed     in substantial      conformity    with the plans and specifications
submitted by the builder         with its anolication        for mortgage insurance:,
Although FHA is not a party to the warranty and has no authority                  to enforce
it, FH& can administratively           impose restrictions       on the builder's   future
participation       in an FHA mortgage insurance program when it finds that the
builder     has not corrected      major construction      defects,

      As discussed with you on January 28, 1971, our review did not include
a comparison of the type and quality    of housing provided   under the FHA and
Farmers Home Administration   programs, because the Frontier    Heights project
was built   under the CHOICE program and was not typical    of FIG-sponsored
housing.

       We did not obtain formal written   comments from any of the parties
involved    in the matters discussed in the report,

        Since disclosure    of information included      in this report     may be pro-
hibited     by the United   States Code (18 U,S.C,      19051, we shall     not disclose
B-171630



its contents to the public,      That statute makes it a criminal   offense   to
disclose    the "amount or source of any income, profits,   iosses, or
expenditures"    of any person or firm,




                                              Comptroller  General
                                              of the United States


YJhe Honorable Lloyd Meeds
House of Representatives
       Congressman         LLoyd Meeds, by letter                  dated December 21, 1970,

requested      the General         Accounting          Office      to review      and report           on six

specific     areas      relating     to the Frontier               Heights     housing       project       in

Snohomish County,           Washington,             These areas are as follows:

       1,    construction          costs0

       2.    Financing        arrangements           and costs,

       3.    Material       specifications,

       4,    Builder's     performanc e with respect to guidelines
              ai    speciiicatlons     of the .t'ederal Housing
              Administration       (F&4), Department of Housing and
              Urban Development,

       50    FHA and Snohomish County inspection                          procedures0

       6,     FHA follow-up         procedures           for     discharging      buyers'       complaints,

       our review        was conducted             primarily       at the Seattle           FHA area office,

the office      of the builder          (Village          Homes, Inc.,         Mountlake        Terrace,

Washington),         and the project           site,       We discussed          certain      aspects       of the

development      of the project             with     the design        and landscape          architects        and

with   the planning         engineers        employed           by the builder       to assist          in planning

the project,          We also had several               meetings       with    Snohomish County officjals
                                                                                                                           --
who were knowledgeable              of the plann'lng              of the project           and the inspection         of

the construction           work,
         We also used a team of architect-engineers                                    from the Seattle         District

of the Corps of Engineers                        to assist      us in the inspection                  of 13 houses in

Frontier       Heights         that     were the subject             of homeowners'complaints                 and in

the evaluation            of material              specifications            and builder's            performance.

         On February           5, 1971, we submitted                 to Congressman Meeds an interim

report --which          included          the results         of the CorpsPinspection                   and certain

summary data on the builder's                         costs and selling            prices       for     the houses con-

structed       and sold         in the Frontier              Heights    project--and           a copy of the Corps'

inspection          report.

         Frontier       Heights         was one of the initial                 pilot      projects       developed

under      the FHA-sponsored               Cost-Effective            Home Ownership           and Improved           Con-

temporary       Environment(CHOICE)                   program       which was intended                to increase      the

supply      of homes for              families      of modest incomes.                 The specific         objectives

of the CHOICE program were economical                               land development           without       sacrifice        of

an attractive           environment              and simplified        housing          construction        without        com-

promise       of quality,

         The CHOICE program                was a cooperative            effort         among housing         builders,

local      government          agencies,          and FHA,        Builders       were encouraged            to use

innovative,          cost-cutting            techniques         in construction            and site        development,

The local       government             agencies       and FHA were to examine the applicable                           zoning

requirements          and building               codes and determine             those which           can be relaxed         in

order      to reduce          costs without           sacrificing       an attractive            environment          or

essential       quality         of construction,                In CHOICE projects,              the FHA minimum
property       standards         are used as guidelines                 rather         than as minimum requirements.

For the Frontier               Heights       project,        a number of local             zoning       requirements         and
        FHA minimum property                  standards     were relaxed,               For example,           smaller     lots,

        narrower      one-way         streets,       reduced        distances         between houses and streets,

        open drainage        ditches           or swales,       and smaller            housing   units         were approved

        by Snohomish County and FHA,

                Houses built           in a CHOICE project                  may be insured       by FHA under             the

        several      mortgage         insurance       programs         authorized        by the National            Housing

       Act,     as amended (12 U.S.C,                 1701).         Most of the Frontier               Heights      houses sold

        as of January        1971 were financed                 with        mortgage     loans       insured     pursuant        to

       sections      203 or 235 of the act,,                   Under section            235, part       of the homeowner's

        monthly      mortgage         payment is paid           by FHA.

                The plans       for      the Frontier          Heights        housing      project      provided         for    the

        construction        of 563 detached               and townhouse           units--in          six divisions--and

        207 apartment        units.            As of January           1971, construction              of 203 of the 308
        hot>cing l_rni+c ~llnpp<               fnr
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                                                                       -,       onA d3 *.-v
                                                                             F) -..u
                                                                             -3        hCln,lI-.a.r.n nwT...l,C,$ ,T-.d 135
                                                                                             IL**. C"".~'C~~"

        of the completed              units      had been sold,,             Further     construction           of housing

        units      in divisions          3, 4, 5, and 6 has been suspended,                           and no construction

        work has been started                  on the apartment              units,




IllI
                                                  RESULTS OF REVIEW

CONSTRUCTION COSTS

      We computed the average                    construction        cost for          the 203 housing             units

completed       as of January           1971 in divisions            1, 2, and 3               on the basis           of

the builder's        construction            cost records.             We allocated              the builder's

overhead      costs and the interest                 on its       loans    for     the purchase           and

development        of the land and construction                     of the houses                to the units              on

the basis       of data obtained           during        discussions        with        the builder         and with

the Washington        Federal          Savings     and Loan Association,                     Seattle,      Washington,

which had provided            the loans          to the builder,

      The following           table      shows our analysis               of the average                cost of the               -

completed       housing      units      in divisions          1, 2, and 3.



                                                     Division    1                     Division   2               Division   3
                                                     t.55 units)                       (98 units)                 (50 units)

Land acquisition                                     $      317                        $      317                 $         337
Land development                                         2,506                              1,898                    1,884
House construction                                       9,209                             10,104                  . 9,741
Nursery and community center                                 44                                 44                       44
Selling  costs                                           1,846                              1,944                      2,224
Interest  expense                                        1,208                              1,236                      I.,199
Overhead                                                   725                                 742                         719
                     Total                           $15,855                           $16,285                     $16,128

       Selling      prices      of Frontier          Heights       houses ranged              from      $12,800       to

$21,250.         Average     selling      prices,        by division,            for       the 135 units          sold as

of January        1971 were as follows:
                                                                    Division   1                        Division   2                     Division    3
                                                                    (53 units)                          (74 units)                       (8-- units1
Average selling     price
 (including   appliances                          >                     $16,347                           $16,741                        $18,081

         The builder's                    average         profit          on the 135 houses sold in the three

divisions            was $560, which                     is within            the profit               guidelines                  established            by

FHA for         this        project.

FINANCING ARMGEMENTS AND COSTS

         Loans for                 Frontier        Heights              land acquisition,                        land development,                  and

construction                were obtained                 by the builder                     from the Washington                        Federal

Savings         and Loan Association.                              We were informed                       by an official                 of Washington

Federal         that,             as of January             1971, the builder                         had outstanding                   loans       for

Frontier            Heights           amounting           to about            $2 million,

         As     p    rnndif-inn            fnr     thy      !n‘lan,c,      ‘IJfl:~~r?g:+~n            +~~r?.l         rn_qzfrrc’         Et-2.t     111


mortgage            loans to buyers                   of completed                 housing            units        be made by it                  unless

it     elected         to place            the loans with                  another            lender,              Washington            Federal

made loans for                     82 of the 135 Frontier                          Heights            houses sold as of January

1971.          The remaining                  houses sold were financed                                 with        loans          from the Carroll

Mortgage            Company, Seattle.                      FHA. has insured                     all        the 135 mortgage                   loans

made for            the Frontier                 Heights         houses,              Of the 135 loans,                       50 were insured

under         the provisions                  of section                203 of the National                        Housing           Act and 85            were

insured         under             the provisions              of section                 235,

         The average                  closing         costs for            buyers            of Frontier              Heights           houses were

$460.          These costs included                         such items as taxes,                                insurance,           recording            fees3

credit         report             fees,    loan service                  fees,        and FHA property                     appraisal              fees,

Part     of the closing                    costs of many of the buyers who obtained                                                   mortgage            loans
insured      under          section      235 of the act were,                    at the buyers'             requests,

included       in the loans rather                        than paid in cash.

        As shown on page 4, the builder's                                average          selling       costs      ranged

from $1,846           for     houses in division                    1 to $2,224           for     houses in division                  3,

The largest           items of cost were real                        estate       commissions,            sales     taxes,        and

loan      service       fees in excess of the 1 percent                                paid by the buyer,

MATERIAL SPECIFICATIONS

          The Corps of Engineers,                         which assisted             us in our evaluation                of

material       specifications,                     found no evidence              that      the materials           used by the

builder       in Frontier              Heights            houses did not meet E'HA-approved                        material

specifications               for     the project,

          The Corps noted,                however,           that    the material               specifications         provide

for     the use of standard-grade                           lumber     for     floor      joists       in certain        townhouses

and that       this         grade of lumber would not meet the stress-load                                         requirements

and deflection               tolerances             of the FHK minimum property                        standards,           The

builder       stated,          however,            that     a better         grade      (construction)            of lumber had

been used for               floor      joists,             The Corps'         inspection           of three       of these           town-

houses showed that                    construction-grade                lumber had been used for                      the first-

floor      joists       of two units                and that        a mixture          of standard-,             construction-,

and select           -grade            lumber had been used for                         the first-floor              joists          of

the third           unit.

          Although          Frontier       Heights           homeowners had complained                     about      such defects

as warped and cracked                     wooden beams: cracked                        concrete      patios,        carports          and --

walkways;           cracked         plaster;          and exposed nailheads,                     the Corps found              that         these

                                               \
                                                                                                                         -6-
defects       generally      had been caused by normal                    shrinkage          of wood and concrete

products.         The Corps found also                that     the electric          baseboard         heaters     were

a standard,        approved        type and that             the plumbing         materials       met local

building       requirements,              The Corps noted,            "however,      that     in two units             the

kitchen       cabinets     were not fastened                 securely     to the walls.            One homeowner's

complaint       about     pitch     dripping        from a ceiling             beam was considered               justi-

fied      by the Corps,            With respect            to homeowner complaints                regarding            the

washability        of interior            wall    paint      and inadequate         window-locking              devices,

the Corps noted           that     the paint        had a low degree              of washability           and that

the locking        devices        were poorly         designed,          We found,          however,     that     no

standards       had been established                by FHA for          these     items.

BUILDER'S PERFORMANCEWITH RESPECT TO
FHA GUIDELINES AND SPECIFICATIONS                                 .




the project        by FHA and Snohomish County.                         A11 housing          designs     and land

development        plans were required                to be approved            by FHA and the county                   prior

to the beginning           of construction,

          The Corps found          that      the housing        designs        and land development               plans

generally       had been prepared                in accordance          with    the guidelines           established

by FHA and the county;               however,         it     did note the following               homeowner com-

plaints       which could         be attributed            to deficiencies           in the housing             designs         or

land      development      plans,




                                                                                                                 -7-
           1.3         'Walls between townhouse                                  units      did not provide               adequate       fire
protection               and sound barriers,

      2, Crawl-space                                    drainage         under houses was inadequate                           or
nonexistent.

       3,               Drainage                 ditches           and swales did not provide                           adequate
drainage                runoff.

          The Corps noted                                further        that      many of the homeowners'                         complaints         were

the result                 of poor workmanship                             rather          than design           deficiencies;           however,

it    considered                   the overall                     workmanship             generally          acceptable,            In the Corps'

opinion,                the most flagrant                             examples of poor workmanship                          included          faulty

bathtub                overflow                 connections,             unnecessarily                large      and ragged          openings             in

walls            for     plumbing                     pipes,       and improperly              applied          roof      sheathing.

          The Corps> on the basis                                       of its        inspection             of 13 houses in Frontier

Heights,                concluded                     that     the houses were structurally                             adequate,       except            for

(1)      those townhouse                               units       where standard-grade                       lumber,      as specified              by
Cl,                                        .
LLI(C;LsLO'LSli+            iI:iiSi~;lra              5 uldry Last:      LJ~=w      USIA      IUL     fiuor      joisis      and iLj          I;wo

houses which had roof                                        defects     resulting            from poor workmanship.

FHA AND SNOHOMISHCOUNTY INSPECTION PROCEDURES

           Both FHA and Snohomish County made inspections                                                              of the Frontier               Heights

houses at three                                stages         of construction--foundation,                             framing,      and completion,

The county also made a separate                                                plumbing         inspection,             and the State            made

electrical                 systems inspections,

           During           various                    phases of construction,                        additional           inspections           were

made by FHA and the county                                            because of the experimental                          nature      of the project,

          We examined                           all      the building             permits           issued      by the county           for      con-

struction                of houses in Frontier                                 Heights       divisions           1 and 2.           These permits--
showed the county's                                    approval         at each stage of construction.
        We examined also                 FHA files       of inspection             reports         on 11 houses con-

structed        in division           2.       The inspection           reports         on six of the houses noted

that    certain         work had not been completed                       at the time of the inspection                            or

that    certain         items       required        correction.           Of the six items noted by FHA,

four    concerned          crawl-space             drainage,        Each of the 11 files                       contained       a

final       inspection          report      which      indicated         that     all     work had been completed

to the satisfaction                  of FHA.

        A Snohomish County official                        stated        that     the county had six residen-

tial    construction               inspectors         and four      plumbing            inspectors         to inspect          con-

struction         of houses in the county                      during     1968 when most of the Frontier

Heights       houses were under                 construction,             During         the same period,              the FHA

Seattle        area office           had a staff          of seven to inspect                    construction          work in

the Seattle           area0         'We were informed             by l?HA that           the daily         work load of its

inspectors           varied        because an inspection                 might      require         from 10 minutes                to

2 hours,        depending           on the problems             encountered,              We were informed                 also     by

FHA that,         during        the peak construction                   period      of 1968-69,                some inspectors

made between             18 and 24 inspections                  a day,

           Inspection         of     Frontier         Heights      houses were also made by Washington

Federal.          These inspections                 were made in connection                      with     the builder's

request        for     loan advances            and were primarily                concerned             with     determining

construction            progress0            During      the inspections,                however,         Washington         Federal

verified        that      FHA, State,           and county         inspections             for     compliance         with        code

requirements            had been made,

FHA FOLLOW-LJFPROCEDUREFOR
DISCWLRGING BUYERS' CQMXAINTS

           l?I-IA regulations            require      the builder          or seller             of newly constructed

houses,        such as those at Frontier                       Heights,         to give          home buyers         who have
FE&insured         mortgage           loans a l-year               warranty         that      the houses have been

constructed          in substantial           conformity                 with     the plans           and specifications

submitted       by the builder             with      its     application              for     mortgage       insurance.

We were informed              by the builder               that     it     would repair               any major       construc-

tion     defects      detected          in Frontier          Heights             houses within           a reasonable

period      of time after             expiration           of the l-year              warranty          period     required

by ET&

         Normally,          when construction               defects             are detected,           the homeowner

notifies       the builder            and the builder               determines              who is responsible               for

the repairs.           If     the homeowner is not satisfied                                with      the builder's

decision,       he can notify             FHA,       When such a complaint                         is received,         FHA

sends the complaint               to the builder                  with      a request          that     a report       concerning

the disposition              of the complaint               be submitted              to ETA within              a certain
n,,mhnr n$
..--.a---     An..,-
          1.h ".+,"O          II---
                              "L.'"“ --- -- * -+ u: &c i&irier:s
                                     LT;\-czLpC                                            reports,      LnA sends a Letter

to the homeowner explaining                        the position                 of the builder,             FHA considers

the case closed              unless      the homeowner informs                       FHA that          he is not satisfied

with     the action          taken by the builder,                        In such cases,               FHA inspects          the

house and makes its               own determination                      of responsibility                and notifies             the

homeowner and the builder                    of its         findings,              Although           FHA is not a party                 to

the warranty          and has no authority                    to enforce             it,      FHA can administratively

impose restrictions                   on the builder's               future        participation            in an FHA mortgage

insurance       program        when it       finds         that      the builder             has not corrected               major

construction          defects.




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