oversight

Tighter Control Needed on Occupancy of Federally Subsidized Housing

Published by the Government Accountability Office on 1971-01-20.

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

                               8-774860




Department of Housing and
  Urban Development




BY THE COMPTRULLER   GENERAL
OF THE UNITED STATES
                        COMPTROLLER     GEMERAL      OF   THE      UNITED     STAT&S
                                      WASHINGTON.     D.C.      20548




        B-114860




    I   To the     President   of the Senate    and the
        Speaker      of the House   of Representatives

                 This is our report      on the need for tighter      control     on
        occupancy       of federally   subsidized   housing  provided       under
        programs       administered     by the Department     of Housing        and    Z2
        Urban     Development.       Our review    was made pursuant          to the
r       Budget     and Accounting     Act, 1921 (31 U.&C.      53), and the Ac-
        counting     and Auditing    Act of 1950 (31 U.S.C.      67).

                Copies   of this report     are being sent to the Director,
        Office   of Management       and Budget,     and to the Secretary   of
        Housing    and Urban     Development.




                                                  Comptroller               General
                                                  of the United             States
COikPTROLLER
           GENERAL'S                            TIGHTER CONTROLNEEDEDON OCCUPANCY
REPORTTO THECONGRESS                            OF FEDERALLYSUBSIDIZED  HOUSING
                                                Department of Housing and Urban
                                                Development B-114860


DIGEST
------

iTHYTZERFlrIEWWASMADE
       Since 1961 the Department of Housing and Urban Development (HUD) has                          - '
       had a mortgage insurance program authorized by section 221 of the
       National Housing Act to provide multifamily   housing for low- and
       moderate-income families.   Under the program, the Government fi-
       nances mortgage loans on cooperative and other rental housing proj-
       ects at interest  rates of as low as 3 percent.

       In 1968 HUD was authorized by section 236 of the act to administer a
       multifamily   housing mortgage insurance program for lower income
       families,   under which HUD can pay all interest on privately  financed
       mortgage loans in excess of 1 percent.

       At the time that the General Accounting Office (GAO) began its review
       in the latter part of 1968, no section 236 projects were in operation.
       Therefore GAO's review was focused on the earlier         section 221 program
       in areas served by HUD's Boston, Dallas, Detroit,         and Fort Worth in-
       suring offices,       which had about one fourth of the projects.            A determi-
       nation, however, of the adequacy of HUD's policies _._and           procedures         for
                                                                   .-._F..._ .-..___. --._ -,...--
       rating. the.-qligibility     of~iX%+~or~~ocCup%ncy       of houslng under-,-the
       section 221 program will have applicability        to the section 236 program.
       HUD has establisheX‘similar        policies and procedures for that program.


FIil'DINGSAflD CONCLUSIONS
       Procedures and practices of HUD and project owners were not adequate to
       ensure that the federally subsidized housing was provided to families
       that were intended to be served by the section 221 program. (See p. 11.)

       The records at 25 projects opened for occupancy during the 12 months
       ended June 1968 showed that project owners (1) did not obtain current
       income and employment information   from families   occupying about 20 per-
       cent of the 2,947 units and (2) did not verify,     prior to occupancy, in-
       come and employment information   reported by families    occupying about
       26 percent of the units.

       Without current   income information,  as required by HUD procedures, the
       project   owners had no assurance that those families  had incomes within
Tear Sheet
                                                                                   1
                                   -.   .,
                                                                                   1
                                                                                   I

                                                                                   ;
the limits    prescribed by ND for occupancy of the federally       subsidized     :
housing.     (See p. 15.)                                                          II
                                                                                    I
Some HUD insuring offices had not reviewed the practices of projects
in enough depth to ascertain whether HUD's procedures for determining
the eligibility      of families for occupancy of housing units were being
followed.       HUD could not be sure that the projects were being operated        I


in accordance with objectives       of the program.   (See p* 16.)                 I




GAO's test of the incomes reported to the 25 projects by families
occupying about one tenth of the housing units showed that 33 per-
cent of the families may have had incomes that exceeded the pre-
scribed limits.    Income information provided by many of these fam-
ilies

  --may not have included    the incomes of all    adult   members and

  --may not have been current, in the case of applicants     for coopera-          :
     tive housing, because income information   often was furnished con-           II
     siderably in advance of occupancy--sometimes nearly a year to
     comply with a HUD requirement that 90 percent of the cooperative
    membership be approved prior to construction     of the project.
     (See p. 18.)

GAO also checked on whether some projects jn operation several years
were following    HUD's procedures for determining whether tenants con-
tinued to be eligible     for subsidized rents.      GAO found that the proj-
ects had not verified,     as required, updated income information      received
from families    occupying about one third of the units that GAO selected
for review.    Without such verification,     ,the projects had no assurance
that the families    continued to be eligible     for subsidized rents.     (See
p* 15.) GAO tested the updated income reported by randomly selected
families   in three of the above projects.       The test indicated that about
half of the families may have had incomes which exceeded the incomes
that they had reported.       (See p. 20.)
                                                                                           I
The practices of 38 projects regarding the assignments of families     to                  i
appropriate-sized units also were reviewed.     About 20 percent of the                    I
units checked were assigned to families   of less than the minimum num-                 II:
ber of persons appropriate under HUD criteria.     (See pa 15.)
                                                                                         It
Of 2,500 families occupying units in 25 projects opened during the 12                     I,
months ended June 1968, more than 60 percent contributed     less than 25              :
percent of their incomes for rent.   One fifth  of the families   con-                 II
tributed less than 20 percent.   (See p. 27.)

The Congress has determined a minimum contribution    of 25 percent as
appropriate   for generally lower Income families  under other HUD pro-
grams, including the new section 236 program.     (See p* 27.)
RECOiWENDATIONS
            OR SUGGESTIONS
         HUD should:

               --Strengthen its procedures to promote accurate reporting of income _,-c;L
                  by fami'lies occupying federally     subsidized projects.    GAO suggests-"
                  that each family adult should be required individually        to certify
                  the accuracy of income information.        Also, families approved for
                  membership in federally    subsidized cooperative housing projects
                  more than 60 days before occupancy should be required to provide
                  updated income information    prior to occupancy; and, if their in-
                  comes have increased above the applicable income limits,        they
                  should pay the prescribed rent surcharge.        (See p. 24.)

               --Provide for more effective   surveillance    by its field offices of
                  the adherence of federally  subsidized housing projects to HUD in-
                  structions  for obtaining and verifying   family income information
                  and for assigning families  to appropriate-sized     units.   (See p. 24.)

               --Establish  an appropriate percentage-of-income contribution  as the
                 minimum rent to be required for units in section 221 projects,    the
                  maximum rent being the equivalent market, or unsubsidized,  rent
                  for the housing., [See p. 31.)

         With respect to GAO's recommendation that HUD establish     an appropriate
         percentage-of-income  contribution   as the minimum rent to be required
         for section 221 projects,   the Secretary of Housing and Urban Develop-
         ment has said that, although there have been ample opportunities     since
         the enactment of the program in 1961, the Congress has chosen not to
         amend the legislation   to establish  such a percentage.   (See p. 31.)


AGENCY
     ACTIONSANDUNRESOLVED
                       ISSUES
         The Secretary of Housing and Urban Development stated that HUD was de-
         voting much time and attention  to the consideration    of various income
         verification  and compliance procedures.  He said that GAO's findings
         and recommendations would be studied carefully.      (See p. 24.)

         The Secretary said that HUD already required full reporting of all
         family members' incomes and that requiring approved members of coop-
         eratives to update their income information      prior to occupancy would
         diminish their willingness    to become members. GAO noted that, under
         the program reviewed, all adult family members were not required by
         HUD's procedures to certify     to the accuracy of information  reported
         on their incomes. GAO believes that its suggestion that cooperative
         members’ income information     be updated prior to occupancy is consistent
         with the objectives   of federally    subsidized housing programs.   {See
         pp. 24 and 25.)

Tear   Sheet




                                              3
    The Secretary said also that project managements would be issued strong
    reminders of their responsibilities  in regard to occupancy require-
    ments.


Xd'TEHS FOR COiVSIDERAT.lON
                          BY THE CONGRESS

    The Congress may wish to consider whether HUD should establish    an ap-
    propriate percentage-of-income   contribution  as the minimum rent to be
    required of families   occupying housing units in section 221 projects,
    the maximum rent being the equivalent market, or unsubsidized,    rent
    for the housing.     .
                         Contents
                                                                   Page

DIGEST                                                               1

CHAPTER

  1       INTRODUCTION                                               5
              Section 221(d)(3)  BMIR program                        7
              Section 236 program                                    9

  2       IMPROVED PROCEDURESNEEDED FOR DETERMINING
          ELIGIBILITY OF FAMILIES FOR ASSISTANCE UNDER
          FEDERALLY SUBSIDIZED HOUSING PROGRAMS                    11
              Need for more effective       HUD surveillance
                 of operation    of BMIR projects                  12
                    Family income information       not ob-
                       tained or verified    by projects           14
                    Families assigned to housing units
                       larger than prescribed     by HUD           15
                    Inadequate reviews of project         opera-
                       tions by HUD insuring     offices            16
               Procedures for obtaining      family income
                 information    need strengthening                  18
                    Test of incomes of families        applying
                       for occupancy of BMIR projects               18
                    Test of updated income reported by
                       families  after 2 years! occupancy           20
               Conclusions                                          23
               Recommendations to the Secretary          of
                 Housing and Urban Development                      24

  3       MINIMUM PERCENTAGE-OF-INCOm CONTRIBUTION
          SHOULD BE ESTABLISHED FOR OCCUPANCYOF BMIR
          HOUSING                                                   27
               Proposal, agency comments, and GAO eval-
                 uation                                             31
               Matter for consideration  by the Congress            33

  4       SCOPEOF REVIEW                                            34
APPENDIX                                                           Page

       I   Letter dated September 25, 1970, from the
              Secretary of Housing and Urban Development
              to the General Accounting Office                      37

  II       Principal      officials     of the Department of
             Housing      and Urban Development responsible
              for the     administration      of activities dis-
              cussed    in this report                              42

                              Al3BRJWIATIONS

BMIR       Below-market-interest-rate

GAO        General    Accounting    Office

GNMA       Government National          Mortgage   Association

HUD        Department     of Housing and Urban Development

IRS        Internal     Revenue Service
COJPTROLLh'RGENERAL'S                  TIGHTER CONTROLNEEDEDON OCCUPANCY
REPORTTO THE CONGRESS                  OF FEDERALLYSUBSIDIZED HOUSING
                                       Department of Housing and Urban
                                       Development B-114860


DIGEST
------

WHYTHE REVIEW WASMADE

    Since 1961 the Department of Housing and Urban Development (HUD) has
    had a mortgage insurance program authorized by section 22? of the
    National Housing Act to provide multifamily   housing for low- and
    moderate-income families.   Under the program, the Government fi-
    nances mortgage loans on cooperative and other rental housing proj-
    ects at interest  rates of as low as 3 percent.

    In 1968 HUD was authorized by section 236 of the act to administer a
    multifamily   housing mortgage insurance program for lower income
    families,   under which HUD can pay all interest on privately  financed
    mortgage loans in excess of 1 percent.

    At the time that the General Accounting Office (GAO) began its review
    in the latter   part of 1968, no section 236 projects were in operation.
    Therefore GAO's review was focused on the earlier         section 221 program
    in areas served by HUD's Boston, Dallas, Detroit,         and Fort Worth in-
    suring offices,    which had about one fourth of the projects.       A determi-
    nation, however, of the adequacy of HUD's policies         and procedures for
    rating the eligibility     of families   for occupancy of housing under the
    section 221 program will have applicability        to the section 236 program.
    HUD has established     similar policies    and procedures for that program.


FINDINGS AND CONCLUSIONS

    Procedures and practices of HUD and project owners were not adequate to
    ensure that the federally subsidized housing was provided to families
    that were intended to be served by the section 221 program.  {See p. 11.)


    The records at 25 projects opened for occupancy during the 12 months
    ended June 1968 showed that project owners (1) did not obtain current
    income and employment information   from families   occupying about 20 per-
    cent of the 2,947 units and (2) did not verify,     prior to occupancys in-
    come and employment information   reported by families    occupying about
    26 percent of the units.

    Without   current income information,  as required by HUD procedures, the
    project   owners had no assurance that those families  had incomes within
the limits    prescribed by HUD for occupancy of the federally     subsidized
housing.     (See p. 15.)

Some HUD insuring offices had not reviewed the practices of projects
in enough depth to ascertain whether HUD's procedures for determining
the eligibility      of families for occupancy of housing units were being
followed.       HUD could not be sure that the projects were being operated
in accordance with objectives       of the program. (See p. 16.)
GAO's test of the incomes reported to the 25 projects by families
occupying about one tenth of the housing units showed that 33 per-
cent of the families may have had incomes that exceeded the pre-
scribed limits.    Income information provided by many of these fam-
ilies

  --may not have included    the incomes of all   adult   members and

  --may not have been current, in the case of applicants for coopera-
     tive housing, because income information    often was furnished con-
     siderably  in advance of occupancy--sometimes nearly a year to
     comply with a HUD requirement that 90 percent of the cooperative
    membership be approved prior to construction      of the project.
     (See p. 18.)

GAO also checked on whether some projects in operation several years
were following    HUD's procedures for determining whether tenants con-
tinued to be eligible     for subsidized rents,     GAO found that the proj-
ects had not verified,     as required, updated income information     rec&ed--
from families    occupying about one third of the units that GAO selected
for review.    Without such verification,     the projects had no assurance
that the families    continued to be eligible    for subsidized rents.    (See
p. 75.) GAO tested the updated income reported by randomly selected
families   in three of the above projects.      The test indicated that about
half of the families     may have had incomes which exceeded the incomes
that they had reported.       (See p. 20.)

The practices of 38 projects regarding the assignments of families    to
appropriate-sized units also were reviewed.    About 20 percent of the
units checked were assigned to families  of less than the minimum num-
ber of persons appropriate under HUD criteria.    (See p. 75.)

Of 2,500 families occupying units in 25 projects opened during the 12
months ended June 1968, more than 60 percent contributed     less than 25
percent of their incomes for rent.   One fifth  of the families   con-
tributed less than 20 percent.   (See p. 27.)

The Congress has determined a minimum contribution    of 25 percent as
appropriate for generally lower income families    under other HUD pro-
grams, including the new section 236 program.     (See p. 27.)
RECOWENDATIONS
            ORSUGGESTIONS
   HUD should:

     --Strengthen its procedures to promote accurate reporting of income
        by families occupying federally      subsidized projects,   GAO suggests
        that each family adult should be required individually        to certify
        the accuracy of income information.        Also, families approved for
        membership in federally    subsidized cooperative housing projects
        more than 60 days before occupancy should be required to provide
        updated income information    prior to occupancy; and, if their in-
        comes have increased above the applicable income limits,        they
        should pay the prescribed rent surcharge.        (See p. 24.)

     --Provide for more effective   surveillance    by its field offices of
        the adherence of federally  subsidized housing projects to HUD in-
        structions  for obtaining and verifying   family income information
        and for assigning fami'lies to appropriate-sized     units.   (See pa 24.)

     --Establish  an appropriate percentage-of-income contribution  as the
       minimum rent to be required for units in section 227 projects,    the
        maximum rent being the equivalent market, or unsubsidized,  rent
        for the housing.   (See pa 31.)

   With respect to GAO's recommendation that HUD establish     an appropriate
   percentage-o. f-income contribution  as the minimum rent to be required
   for section 221 projects,    the Secretary of Housing and Urban Develop-
   ment has said that, although there have been ample opportunities      since
   the enactment of the program in 1961, the Congress ha5 chosen not to
   amend the legislation   to establish   such a percentage.  (See pa 31.)

AGENCY
     ACTiOh5MD UNRESOLVED
                       ISSUES
   The Secretary of Housing and Urban Development stated that HUD was de-
   voting much time and attention  to the consideration    of various income
   verification  and compliance procedures.  He said that GAO's findings
   and recommendations would be studied carefully.      (See p. 24.)

   The Secretary said that HUD already required full reporting of all
   family members' incomes and that requiring        approved members of coop-
   eratives to update their income information        prior to occupancy would
   diminish their willingness     to become members. GAO noted that, under
   the program reviewed, all adult family members were not required by
   HUD's procedures to certify      to the accuracy of information   reported
   on their  incomes.   GAO believes    that its suggestion that cooperative
   members' income information      be updated prior to occupancy is consistent
   with the objectives   of federally     subsidized housing programs.    (See
   pp- 24 and 25.)




                                    3
The Secretary said also that project managements would be issued strong
reminders of their responsibilities  in regard to occupancy require-
ments.




The Congress may wish to consider whether HUD should establish an ap-
propriate percentage-of-income   contribution  as the minimum rent to be
required of families   occupying housing units in section 221 projects,
the maximum rent being the equivalent market, or unsubsidized,     rent
for the housing.




                              4
                              INTRODUCTION
                              --   -.
       The General Accounting Office has examined into the ad-
equacy of the Department of Housing and Urban DevelopmentVs
policies    and procedures,   and their     implementation,     for deter-
mining the eligibility      of families     for occupancy of federally
subsidized multifamily      housing provided under the below-
market-interest-rate      (BMIR) program authorized         by section
221(d)(3)    of the National    Housing Act, as amended (12 U.S.C.
17150. We directed      our efforts     toward this area because it
appeared to warrant attention.          We did not make an overall
evaluation     of HUDss management of the BMIR program.            The
scope of our examination      is further     described on page 34,

       At June 30, 1970, HUD had insured mortgage loans total-
ing about $1.6 billion      made by the Government National Mort-
gage Association      (GNMA) at interest   rates of as low'as 3 per-
cent for financing      954 BMIR rental   and cooperative   housing
projects   containing    about 114,000 units for families     of low
and moderate income.       In addition,   HUD had commitments to in-
sure GNMAmortgage loans totaling         about $870 million   for fi-
nancing 450 BMIR housing projects        containing  about 53,000
units.

       In 1968 section 236 of the National           Housing Act, as
amended (12 U.S.C. 1715 z-l),          authorized    HUD to administer        a
multifamily   mortgage insurance program under which HUD would
pay all interest      in excess of 1 percent on mortgage loans
made by private     lenders to provide housing for families              with
incomes lower than the income limitations             established     for
the BMIR program.       The legislative      history   of this section
of the act indicates      that the Congress anticipated           that the
financial   assistance    would provide for housing at rents1
within the range of families         that could not afford to pay the
rents for housing provided under the BMIR program.                  No


1Throughout  the report,   rents or rental rates refer both to
 the rents for rental    housing projects    and to carrying
 charges for cooperative    housing projects.
section 236 housing projects were in operation         at the time
that we began our review of the BMIR program.

        A determination     of the adequacy of HUD's policies    and
procedures,     and their     implementation, for deciding upon the
eligibility     of families     for occupancy of housing provided
under the BMIR program will have applicability           to the sec-
tion 236 program, because HUD has established          similar  pol-
icies and procedures        for that program.

       Our examination   was made at HUD's Boston, Dallas,    De-
troit,   and Fort Worth insuring   offices and at selected    BMIR
housing projects     in the areas served by those offices.     At
June 30, 1970, of the 954 BMIR housing projects       in operation,
235, or about 25 percent,     were located in those areas.




                                  6
SECTION 221(d)(3)    BMIR PROGRAM

       The section 221(d)(3) multifamily mortgage insurance
program was amended by section 101(a) of the Housing Act of
~261 (75 Stat. 149) to provide federally   subsidized  housing
to low- and moderate-income    families, The following  state-
merits) with respect to the purpose of the program, were con-
tained in the reports of the banking and currency committees
of both the Senate and the House of Representatives    on the
proposed 1961 housing legislation.

      "There are many families       whose incomes are suf-
      ficiently     high so that they are not eligible       for
      Low-rent public housing but who cannot afford home-
      owership even if assisted by FHA insurance of no
      downpayment 40-year mortgage loans.         This is par-
      ticularly     true of families   living  in central    cities
      where high land costs make it impracticable          to pro-
      vide single-family     homes. Many of these same fam-
       ilies    also cannot afford apartment-type     housing
      even of modest design if it is financed at the
      going F-U interest      rate and subject to the regular
      FHA insurance premium."

      To provide housing at rental rates which would be lower
than those available    for privately   owned housing, GNMAmakes
mortgage loans at below-market-interest      rates for financing
housing projects,    and HUD waives the premium usually charged
for insuring   mortgage loans.

      Initially      the interest   rates on 3MIR mortgage loans
could be as low as the average market yield on all outstand-
ing marketable      obligations    of the United States as estimated
by the Secretary        of the Treasury.      The Housing and Urban
Development Act of 1965 amended section 221(d)(3)              of the
National     Housing Act to provide that the E@iIR mortgage loans
bear interest      rates of nqt less than 3 percent or the aver-
age yield on all outstanding         marketable    obligations   of the
United States.         The BMIR mortgage loans approved for financ-
ing prior to the enactment of the Housing and Urban Develop-
ment Act of 1965 bear interest           at rates of 3-7/8, 3-3/8, or
3-l/8 percent.        All BMIR mortgage loans approved for financ-
ing since 1965 bear interest         at a rate of 3 percent.



                                   7
        GNNA estimated   that it incurred      interest    expense of
$19 million    and $37 million     in fiscal     years 1969 and 1970,
respectively,     to finance the BMIR programs authorized             by
section 221 of the National Housing Act.              Similarly,     GNMA
has estimated     that it will   incur interest       e':dPpenseof $69
million    and $84 million    on these programs ici fiscal         years
1971 and 1972, respectively.         All but relatively         minor
amounts of these estimates pertain           to the costs of borrowing
required    to finance the section 221(d)(3)          WHIR program,

      To ensure that the housing provided under the BMIR
mortgage loan program would serve families        of low and mod-
erate income, HUD established,      for each metropolitan    area
in which the program was to be operative,       income Limits,    by
size of family,    for occupancy of units in BMIR housing proj-
ects D HUDDs instructions     to its insuring  offices    and to
BMIR project    owners defined family income as al.1 gross in-
come, before taxes and other deductions,      received by all
members of a family except dependent children.

       For the metropolitan       areas included     in our review, the
following    income limits      became effective     in April 1967.

                                          Family size
                                             3 and    5 and       7 per-
                       1 per-      2 per-   4 per-   6 per-        sons
 City   and State        son
                         --z-       sons      -sons   sons
                                                      __I        or more

Boston, Mass.          $5,750      $6,950   $8,200     $9,450    $10,650
Detroit,  Mich.         5,750       6,950    8,200      9,450     10,650
Dallas,  Texas          5,300       6,400    7,550      8,700      9,800
Fort Worth, Texas       4,600       5,550    6,550      7,550      8,500

        The income limits for a locality  were based on the
lesser of HUDqs estimate of the family income needed to pay
the monthly rent for a housing unit in a typical     BMIR housing
project    and the median family income published by the Census
Bureau and adjusted by HUD, as necessary3 to take into ac-
count more recent locality     wage data.
SECTION 236 PROGRAM
---.
       Section 201 of the Housing and Urban Development Act of
1968 amended the National     Housing Act by adding section 236
which authorized    HUD to administer     a multifamily     housing
mortgage insurance program under which housing would be pro-
vided for occupancy by families       having incomes that did not
exceed 135 percent of the income limits         established    for low-
rent public housing or 90 percent of the income limits              es-
tablished    for the BMIR program.

       Section 236 provides for the insurance of mortgage loans
made by private      lenders,    rather than by GNMA as in the case
of the BMIR program, for financing           such housing projects     and
for HUD's payment on behalf of project            owners of all inter-
est in excess of 1 percent on the mortgage loans and of the
mortgage insurance premiums.           The legislative   history   of sec-
tion 236 indicated       that the Congress anticipated       that the
financial    assistance     authorized   by this section would pro-
vide for housing at rents within          the range of families     that
could not afford to pay the rents for housing provided under
the BMIR program.

       Section 236 provides for the establishment          of a basic
rent for a unit in a housing project        on the basis of the
project"s    mortgage bearing 'interest   at the rate of 1 percent
per annum. The section provides also for the payment by ten-
ants of a monthly rent equivalent       to 25 percent of their
monthly income dr the basic rent, whichever is greater;            how-
ever, the rent .assessed a tenant cannot exceed the rent
which would be assessed if the project        received no financial
assistance    from HUD. Section 236 requires       project    owners to
pay HUD all rentals    collected    in excess of the basic rentals.

       As of June 30, 1970, HUD had insured mortgage loans to-
taling   about $78 million   for 43 projects'containing       about
5,000 housing units under the section 236 program and had
contracted   to pay all interest    ojr, these loans in excess of
1 percent per annum. In addition;          HUD had commitments to
insure and make interest    payments on mortgage loans totaling
about $1.3 billion    for 760 projects      containing  about 88,000
housing units under the section 236 program.
      A list   of the principal    officials      of HUD responsible
for the administration      of activities      discussed in this report
is included-as    appendix II.




                                    10
                                    CHAPTER2

                   IMPROVED PROCEDURESNEEDED FOR

     DETERMINING ELIGIBILITY           OF FAMILIES
                                           -_ls.-----. FOR ASSISTANCE
           UNDER FEDERALLY SUBSIZED HOUSING PROGRAMS

       HUD's procedures and those of owners of BMIR housing
projects    included in our review were not adequate to ensure
that the housing was provided to families            who were eligible
to occupy it in accordance with the criteria            that HUD had
established     to accomplish the objectives       of the program.
Project   owners frequently     did not comply with HUD require-
ments for obtaining     and verifying     family income information
and often assigned families        larger units than appropriate
under HUD criteria.      Some HUD insuring      offices    had not re-
viewed project     owner practices     in enough depth to ascertain
whether HUD's procedures were being followed.

       Our tests of incomes reported        to owners of EMIR housing
projects   by a randomly selected number of families          occupying
units in projects      that were opened for occupancy during the
12 months ended June 1968 indicated           that about one third   of
the families    selected may have had incomes that exceeded the
BMIR limits.     A limited     test of the incomes of families      who
had occupied units for 2 years and had provided updated in-
come information     to reestablish     their eligibility   for sub-
sidized rents indicated        that over half of the families      may
not have accurately       reported  their    incomes.

       We believe that HUD needs to strengthen    its procedures
and to develop additional     measures to promote accurate re-
porting   of incomes by families   seeking to occupy or continue
to occupy units in BMIR federally      subsidized housing proj-
ects.

      We   believe also that          HUD needs to provide more surveil-
lance of     the practices     of     BMIR projects   to ensure that the
housing    is provided only         to those families     that the Congress
intended     to benefit    from     the subsidized    program.



                                        11
NEED FOR  ~-.-MORE EFFECTIVE
                     __~____ HUD SURVEILLANCE
OF
----- OPERATION  OF  BMIR ---PROJECTS

        Under HUD's procedures, a family is eligible     for occu-
pancy of BMIR housing if its income is within certain        limits.
The income limits    published by HUD for the metropolitan
areas included in our review and a discussion       of the manner
in which they were derived are included in chapter 1 of this
report.

       HUD procedures require that, within      60 days prior to
occupancy, applicants    for occupancy of units in BMIR housing
projects   provide the project    owners with information       on
places of employment and on income during the preceding
12 months to establish     their eligibility    for occupancy under
the applicable    income limits.     The procedures require      (1) the
head of the family to certify      that he has included all fam-
ily income and (2) the project       owner to verify    the family
members' income information      by obtaining   written    statements
of earnings from their employers.

       Also, HUD's procedures require       (1) families   who occupy
units in BMIR housing projects        to provide updated income in-
formation    to the project   owners every 2 years to reestablish
their eligibility     for subsidized    rents and (2) the project
owners to obtain employer verification          of the updated income
reported by members of the families.           The procedures provide
that,   if a tenant family's     income has increased above the
applicable     income limit  (plus an allowable excess of 5 per-
cent) for occupancy of a BMIR housing unit,           the family can
continue to occupy the housing unit provided it agrees to
pay a rent surcharge.

       HUD instructions       state that the rent surcharge should
be the lesser of 20 percent of the rent of the unit occupied
or 25 percent of the amount by which the family's                income is
in excess of the applicable          limit.     HUD officials    informed
us that the 20-percent         surcharge represented        HUD's assess-
ment of the average difference            between rents of privately
financed rental      projects     and those of BMIR projects.         The
surcharges collected        are required      to be deposited with GNMA
for use at the discretion          of HUD.




                                    12
        HUD instructions     to BMIR project  owners also require
that eligible      families    be assigned appropriate-sized  units
on the basis of the number of persons in the households and
their relationship        and sex, in accordance with the following
criteria.

                  Number of          Number of persons
                   bedrooms          Minimum   Maximum

                  Efficiency               1          2
                        1                  1          2
                        2                  2          4
                        3                  4          6
                        4                  6          8

      Under these criteria,     a project    owner could assign a
one-bedroom unit to an individual         if an efficiency    (no-
bedroom unit) were not available       or if there were no effi-
ciency units in the project.       Also, a two-person       family
could occupy a two-bedroom unit if their ages differed
widely (e.g.g grandparent     and grandchild),       if they were of
the opposite sex (e.g.,     mother and son), or if the health
of one of the persons made separate bedrooms desirable.

       HUD has established     similar procedures  for determining
family eligibility     on the basis of income and for assigning
families   to housing units provided under the program for
lower income families      authorized  by section 236 of the Na-
tional   Housing Act.    At the time that we began our review,
however, no projects     were in operation    under this program.

       HUD procedures also required          that its insuring       offices
make reviews of the operation         of BMIR projects        in sufficient
depth to determine if HUD's occupancy requirements                 relating
to family income and assignment of housing units were met
by project     owners both initially        and on a continuing       basis.
The initial     review by insuring      offices     is required    to be
made within 3 months after a project             has opened for occu-
pancy.     Thereafter,  insuring     offices     are required    to make
follow-up    reviews every 2 years.

        From the 116 BMIR projects in operation at June 30,
1968,    in the areas served by HUD's Boston, Dallas, Detroit,



                                      13
and Fort Worth insuring    offices,   we selected for review 38
projects containing   5,825 housing units--2,947     units in 25
projects which became available     for occupancy during the
12 months ended June 1968 and 2,878 units that became avail-
able for occupancy in prior periods.

Family income information       not obtained
or verified
--          by projects

      Records at the 25 projects        containing    the 2,947 housing
units that became available        for occupancy during the
12 months ended June 1968 showed that project            owners did not
obtain current     income information      from families    occupying
594 (20 percent)      of the 2,947 units within       60 days prior   to
their  occupancy of the units,        contrary   to HUD procedures.
Of the 594 families,       441 provided the information       more than
60 days prior    to occupancy, 132 provided        it after   they had
moved in, and 21 did not provide the information.

      We also noted that BMIR project        owners had not verified
the income and employment information         provided by 330 fam-
ilies   prior    to their  occupancy of the units.       Also, the in-
formation     provided by another 450 families       either   before or
after   their    occupancy was not verified.

        Of the families      that occupied the 25 projects,       141 were
ineligible      for occupancy of housing units on the basis of
the income information          that they had supplied or that the
project      owners had obtained from the family members' employ-
ers.     The project    records and our discussions       with project
personnel      showed that,     for a large proportion    of these fam-
ilies,     the projects     (1) did not properly    convert the re-
ported hourly,       weekly, or monthly earnings to an annual in-
come basis for comparison with the prescribed             income limits
or (2) did not receive the income data until             after  the fam-
ilies    had been permitted        to occupy the units.

       Generally,    project personnel  indicated   to us that they
were unaware that families       having incomes in excess of the
prescribed    limits   were occupying units in the projects.      We
believe that,      in these cases and in any other similar     ones
that may become known, appropriate       rental   surcharges  should
be assessed and collected.



                                    14
       We also selected six additional      BMIR housing projecrs
that had been in operation       several years and examined into
the project    owners9 practices    for verifying   updated income
information    provided by tenants to reestablish       their eligi-
bility    for subsidized  rents.    Our examination    of project    rec-
ords relating     to income information    supplied by 99 families
showed that the project      owners had not verified     with the
family members' employers the information         provided by 35 fam-
ilies.

       Without current    income information     and/or verification
of it as required     by HUD procedures,     the BMIR project      owners
had no assurance that families        which were admitted to occu-
pancy of units or which continued to occupy the units were
entitled    to the benefits    of federally    subsidized housing.

Families assigned to housing units
larger than prescribed by HUD

       Our review of the practices      of owners of BMIR housing
projects    with respect to the assignment of families       to
appropriate-sized      units on the basis of HUBIs criteria      (see
p. 13) showed that, of 3,731 units selected from 38 proj-
ects, about 20 percent had been assigned to families           of less
than the prescribed      minimum number of persons.      These units
could haveaccommodatedfrom        900 to 1,650 additional    persons
if proper assignments had been made. We noted that at some
of the projects     larger families   were waiting   for units of
the size that were occupied by less than the minimum number
of persons prescribed       by the HUD criteria.

       In addition    to permitting   the exceptions     to its general
assignment criteria       set forth on page 13, HUD permitted        a
large housing management organization,         which managed 14 co-
operative    projects   included in our review, to assign units
larger than those prescribed        by its general criteria      to fam-
ilies   that expected to increase in size or that had children
above the fourth-grade        school level.   Our projection     of the
additional    persons who could 'have been accommodated in the
38 projects     was based entirely    on HUD's criteria.       When our
review of projects      records indicated   that larger units were
assigned to families       for any reasons permitted       by HUD, we
did not consider such units as being inappropriately             as-
signed.
        In several of the 38 BMIR projects,           a particularly
Large number of units were not properly              assigned.      For ex-
ample, of 253 units in one rental project,               132 were occupied
by less than the appropriate            minimum number of persons.        Ac-
cording to a project        official,     this was partly     due to a mis-
interpretation       of HUD's criteria       for occupancy of two-
bedroom units;       however, he also indicated        that the project
preferred      to rent units to smaller families          because their
rental    delinquencies    were less and the repair costs of their
units were lower than those of larger families.                 At this
project,     the waiting    list    for housing units included several
large-sized      families.

        At several other projects,   units were assigned substan-
tially    in accordance with the HUD criteria.      For example,
of 146 units in one rental project,       none of the units were
assigned to fewer persons than prescribed       by t-he HUD crite-
r i a 9 and it appeared to us that this was a result     of a con-
scientious     effort by the project  to follow the criteria.

       BMIR project   personnel and HUD insuring      office     officials
with whom we discussed the assignment of housing units indi-
cated that,    although they were in agreement with the objec-
tives of the HUD occupancy criteria,        priority   generally       was
given to achieving full occupancy of BMIR projects             as soon
as possible    and to maintaining   it.   We therefore       believe
that there may have been a tendency at some projects              to as-
sign housing units on a first-come-first-served            basis, with-
out adequate regard to HUD's occupancy criteria.              Closer ad-
herence by BMIR project      owners to HUD's criteria        could re-
sult in additional     numbers of people benefiting        from this
federally   subsidized housing.

-Inade_euate
   ---          reviews of project
        .-- .- -.--                   operations
 by HUD insuring      offices

        Some HUD insuring  offices    had not made reviews of the
practices    of owners of BMIR housing projects          in enough depth
to ascertain    whether HUD's procedures      for determining     the
eligibility    of families  for occupancy of the units were be-
ing followed.     For example, one insuring       office    had no rec-
ords evidencing     that any reviews had been made in connection
with eight BMIR projects      containing   1,516 units that became


                                     16
available    for occupancy during the 12 months ended June
1968 a We were informed by the insuring       office   officials
that,   although reviews of BMIR projects     had not been docu-
mented for the last several years, reviews had been made of
the above eight projects    and no deficiencies      had been found.

       Our review of the records at the eight projects         showed,
however, that of the 1,516 units,         444 had been occupied by
families     who did not report,   or certify   the accuracy of,
their    incomes within  60 days prior to occupancy and that
628 units had been occupied by families         whose reported   in-
comes had not been verified,       contrary   to HUD's procedures.
Also, about 27 percent of the units in these projects           were
not assigned to families       in accordance with HUD's minimum
occupancy criteria.

        Officials      of another insuring     office  informed us that
they had not been able to make the required               reviews of BMIR
project      owners' adherence to HUD procedures because of in-
sufficient        personnel.     Seven BMIR cooperative       projects     lo-
cated in the area served by this insuring              office     were occu-
pied during the 12 months ended June 1968.                 Our review of
the records of these projects             showed that income information
provided by 151 of 693 families             who occupied the housing
units had not been verified            with their employers.         Also,
about 35 percent of the units in these projects                  were not as-
signed to families           in accordance with HUD's minimum occu-
pancy criteria.

        Over the last few years, HUD's Office of Audit has ex-
amined the records of a large number of BMIR projects              lo-
cated throughout     the nation.     The HUD auditors     have found
significant     noncompliance by BMIR project       owners with HUD's
procedures for obtaining      and verifying     family income infor-
mation and for assigning housing units,           and the results      of
their reviews have been referred        to the HUD insuring       offices
for corrective     action by project    owners.     We believe that
their findings     support our conclusion     that there is a need
for HUD insuring     offices  to provide more effective       surveil-
lance of the adherence of BMIR projects           to HUD's procedures.

     Without effective    surveillance  it appears to us that
HUD has no assurance that its procedures are being followed
or that the BMIR projects     are being operated in accordance
with program objectives.
                                      17
PROCEDURESFOR OBTAINING FAMILY
INCOME INFORMATION NEED STRENGTHENING

       To further  evaluate the effectiveness           of HUD's proce-
dures for determining      the eligibility       of famjq-ies to re-
ceive the benefits     of federally      subsidized     BPlIR housing, we
tested the accuracy of income reported by randomly selected
families    to the owners of BMIR projects.           For our test, we
obtained from the Internal       Revenue Service (IRS) the calen-
dar year 1967 Federal income tax returns            filed by members
of the families    and compared the incomes which they reported
to IRS with the incomes which they reported during the pe-
riod July 1967 to October 1968, in applying for occupancy
or continuation    of occupancy of units in BMIR projects.              We
used the 1967 tax returns because we believed that the in-
come data contained in these returns would approximate                the
annual incomes of the families         at the time that they sub-
mitted income information      to the BMIR housing projects.

Test of incomes of families    applying
for occupancy of BMIR projects

       For our test, we randomly selected 500 of the 2,947
units in the 25 projects     which became available      for occupancy
during the 12 months ended June 1968.        (See p* 14.)     We sub-
sequently   eliminated   133 of the 500 units from our test be-
cause we did not have sufficient     information    to identify,
without disproportionate     effort, the returns    filed   by the
occupants of these units.

     The results                of our test                  for      the remaining                      367 units
are shown below.

                                                          Total         Number      of      Family     income
          Type of project            Number of         units    in        units            exceeded      limits
             and location             projects         projects         sampled           Number            Percent

           Rental    :
                Boston                        7           1,202              143              42              29.4
                Dallas                        4              589              70              22              31.4
                Fort    Worth                 1              149              15                4             26.7
           Cooperative:
                Boston                                       314              39                a              20.5
                Detroit                   $                 -693             100              44               44.0

                      Total               2              ?,947               =367            =120             -32.7a
          aWe recognize      that   this  percentage      may not have been typical           of the 133 units
           eluninated     from our selected        sample      of 500 units.       (See preceding    page.)     If
           it is assumed       that   all the families         who occupied     these   133 units   had incomes
           within     the BMIR limits,      the 120 families         whose incomes,      as shown by our test,
           may have exceeded        the limits     represented       24 percent     of the sample of 500
           units.




                                                              18
       As shown above, about 33 percent of the families   in-
cluded in our test may have had incomes which exceeded the
applicable   BMIR limits.   An,analysis  of the amount by which
the income of these families     exceeded the BMIR income limits
follows.

           Amount by which
            income shown by             Number
          test was in excess               Of
             of BMIR limits            families      Percent

           up to $500                           27      22
           $501 to $1,000                       25      21
           $1,001 to $3,000                     42      35
           $3,001 to $5,000                     16      13
           Over $5,000                          10       9

                Total                                  E100
       Of the above families,     16 were among the 141 families
that had reported incomes in excess of the allowable           family
income limits    for occupancy of units in the projects.           (See
pa 14.)    The remaining 104 families      had reported incomes
which were within     the allowable   family income limits     for
occupancy of units but which were less than their          incomes as
indicated    by our test.

     Of the 104 families,    56 reported    that only one adult
was employed; however, our test indicated        that more than
one adult member of the family had substantial           employment.
For most of the 56 families,    the unreported      incomes were
those of female spouses.     Our test indicated       that, of the
56 families,  29 had annual incomes that were at least 50 per-
cent higher than they had reported,      including      eight families
that had incomes twice as great as reported.

       For most of the remaining 48 of the 104 families,     the
differences   between their  incomes as indicated   by our test
and those reported were principally    understatements   in the
amount of the husband's earnings,

       As shown on page 18, our test indicated    that a larger
percentage of the families   living  in cooperative    housing
projects   in the Detroit, Michigan,   area (44 percent)    had


                                  19
incomes in excess of the prescribed      income limits     than did
families  living   in units in rental projects       (27 to 31 per-
cent).   The families    living in these cooperative      projects
often furnished    income information   considerably     in advance
of occupancy-- sometimes nearly a year--because         HUD proce-
dures provided that at least 90 percent of the cooperative
membership be approved by HUD prior      to the insurance of
mortgage loans to finance project      construction.

       In March 1948 HUD advised the management of the coopera-
tive projects      in Detroit    that it was not necessary for the
families    approved for membership in the cooperative           to up-
date their     income information      before occupancy of the units,
although their       incomes may have increased subsequent to the
approval and prior to occupancy.            We believe that this was
a contributing       factor   to the high percentage of these coop-
erative members indicated          by our test to have had annual in-
comes in excess of the limits          prescribed    for occupancy of
units in BMIR housing projects.

Test of updated income reported by
families after 2 years' occupancy

       To test the effectiveness           of HUD's procedures for de-
termining    the eligibility       of families    to continue receiving
the benefits     of subsidized       rents after they had occupied
BMIR units for 2 years, we randomly selected for review 63
units from three projects          located in the Boston, Dallas,
and Detroit     areas, which were occupied by families         that had
provided the project         owners with updated income information
during the period January to October 1968. Our review
showed that, of the families            that occupied the 63 units,
42 had reported incomes which did not exceed the BMIR limits
for continued occupancy without surcharge (105 percent of
admission limits)      and that 21 had reported incomes which
exceeded these limits         and caused them to pay the rent sur-
charges for continued occupancy.

     Of these 21 families, our test        of family    incomes indi-
cated that 13 may not have reported        their full     incomes, as
shown below.




                                 20
                 Amount by which
              income shown by test                Number
            was in excess of amount                 of
              reported to project                families

                up to $500                           6
                $501 to $1,000                       3
                $1,001 to $2,000                     3
                Over $2,000                         -1
                     Total                          =13
       The project      records indicated   that the 13 families    had
been assessed rent surcharges on the basis of the informa-
tion that they had reported to the projects.              For five of
the families,      the surcharges assessed were the maximum ap-
plicable   to the units occupied.         Therefore   the fact that the
reported family incomes were understated            would not have af-
fected the amount of the rent surcharges.             For the remaining
eight families,       the surcharges assessed were less than the
maximums applicable         to the units occupied and, on the basis
of our test,    should have been higher,

       Of the 42 families      that reported  incomes not exceeding
the BMIR limits,       our test of family incomes indicated    that
21 families    may have had annual incomes which exceeded the
BMIR limits     and which would have required      them to pay rent
surcharges for continued occupancy.          For many of these 21
families,    there was more than one adult wage earner, whereas
information     reported to the projects     by the head of the fam-
ily showed only one employed adult,          Our test showed that
the incomes of the 21 families        were in excess of applicable
income limits      for continued occupancy, as follows:
        Amount by which income shown by           Number of
       test was in excess of BMIR limits           families
                 up to $500                                4
                 $501 to $1,000                            1
                 $1,001 to $3,000                         10
                 $3,001 to $5,000                          3
                 Over $5,000                               3
                      Total                           -21



                                 21
      In summary, 01x test of the updated incomes reported
to the projects    by the 53 families    indicated    that 34 families
may not hav e accurately   reported   their    incomes and that,     of
zkse,    29 should have been required      to pay additional    rent
surcharges   ranging from $2.50 to $29 a montk.




                          BESTDOCUMENT
                                     AVAILABLE




                                  22
CONCLUSIONS

       Our review of the administration     of the occupancy re-
quirements of the BMIR program showed that the procedures
and practices    of HUD and of the projects      owners were not
adequate to ensure that federally       subsidized housing was
provided to families    that were eligible      under the criteria
established    by HUD to accomplish the program objectives.

      Our tests of incomes of families         that occupied BMIR
housing projects     indicated   that many may not have included
the earnings of all adult members in the family incomes re-
ported to the projects.        We therefore   believe that each
family adult should be required        to certify    the accuracy of
information   reported on his or her income.

       Also, because of the significant          time lapse which some-
times occurred between the dates that families              applied for
membership in a federally        subsidized     cooperative   project
and the dates that they actually          occupied housing units,        we
believe that the families        approved for membership in coop-
eratives    should be required     to update their income informa-
tion immediately      prior to occupancy and, if their          incomes
have increased above the applicable           income limits,      to pay
additional    carrying    charges in accordance with HUD's pro-
cedures (see p* 121,

      Our review of the practices    of BMIR project   owners in
adhering to HUD's procedures for obtaining      and verifying
family income information    and for assigning families      to
appropriate-sized    housing units showed that they frequently
had not followed   the procedures   and that HUD insuring     offices
had not provided enough surveillance      to ascertain  whether
the procedures were being followed.
       We believe that HUD needs to strengthen         its procedures
and to develop additional       measures to promote accurate re-
porting   of income by families       occupying federally    subsi-
dized projects.      In addition,     HUD needs to provide more sur-
veillance    of the practices     of owners of federally     subsidized
projects   to ensure that the housing is being used in ac-
cordance with the criteria        established   by HUD to accomplish
the objectives     of the programs and the intent of the Con-
gress.


                                    23
RECOMMEX~DATIONSTO THE SECRETARY
OF HOUSING AND URBAN DEVELOPMENT

       We recommend that HUD reevaluate        its procedures for
the reporting     of income by families      seeking to occupy or to
continue occupying federally        subsidized housing and develop
ways to strengthen       the procedures and promote more accurate
reporting.     We suggest that the procedures require          each
family adult to certify       the accuracy of the income informa-
tion reported     to project    owners.   We suggest also that fam-
ilies   approved for membership in federally         subsidized   co-
operative    housing projects     more than 60 days before occu-
pancy be required      to update their income information        prior
to occupancy and, if their incomes have increased above the
applicable    income limits,     to pay additional    carrying   charges
in accordance with HUD's procedures.

       We recommend also that HUD provide for more effective
surveillance     by its insuring  offices   of the practices  of
owners of federally     subsidized projects    with respect to
their    adherence to HUD'S occupancy requirements.

                               -   -    -   -


     In a letter  to us, dated September 25, 1970 (see
app. I), the Secretary    of Housing and Urban Development
commented on our findings    and the above recommendations.

       With respect to our recommendation that HUD reevaluate
its procedures regarding        the reporting    of family income,
the Secretary      said that HUD was devoting much time and at-
tention    to the consideration       of various income verification
and compliance procedures         that may be conducive to higher
production    of housing under federally        subsided programs
while also giving greater         assurance that the housing will
be available     to occupants at the income level intended by
the Congress.       The Secretary     stated that our findings     and
recommendations have been, and will continue to be, studied
carefully    as these efforts      continue.

      In commenting on our suggestion that each adult family
member be required  to provide owners of BMIR projects with
information  on his or her income and employment, the



                                       24
Secretary    pointed out that HUD's income certification            forms
required    full reporting  of all family income.

       We recognize that, under both the BMIR program and the
section 234 housing program, HUD's procedures require fam-
ilies    to furnish   information    on total    family income.    How-
ever, under the BMIR program, only the head of the family
is required     to cerify     the accuracy of such information;
whereas under the section 236 program, both the husband and
wife are required       to certify.     We believe that certifica-
tion of both spouses should also be required of families
who in the future wish to occupy or continue to occupy BMIR
projects.      Under both programs, we believe also that the
income certification        forms and instructions      should provide
for each family adult to certify          to the accuracy of the in-
come information      reported to project      owners.

        Regarding our suggestion that families            approved for
membership in federally         subsidized    cooperative    housing proj-
ects be required       to provide updated information          immediately
prior to occupancy and that the carrying             charges be adjusted
as appropriate,       the Secretary     stated that it would be very
difficult     to establish     viable cooperatives      if their member-
ships were subject to such a requirement.               He stated that,
because of HUD's go-percent          presale requirement       before con-
struction,      the only practical      time to obtain income data
on which original        membership is based is prior to the start
of construction.         He also said that the imposition          of an-
other income check at the time of occupancy would add an
unknown for prospective         members and would diminish their
willingness       to become members.

       We believe that our suggestion        is consistent    with the
objectives    of the federally    subsized housing programs dis-
cussed in this report.        In our opinion permitting       coopera-
tive members to receive federally         subsidized    housing assis-
tance on the basis of income information           that is not cur-
rent does not seem (1) fair to families           admitted to the
rental   projects --where they must qualify        for assistance    on
the basis of income information        provided no more than 60 days
before occupancy-- or (2) equitable        to the Government.

    We therefore   believe that cooperative members whose
membership is approved more than 60 days before occupancy


                                     25
should be required   to update their      income information   prior
to occupancy and, if their     incomes have increased above the
BNIR limits  to pay additional     carrying    charges in accordance
with HUD's procedures.

       With respect to our recommendation that HUD provide
more effective      surveillance    of the adherence of owners of
BMIR projects     to HUD instructions        for obtaining      and verify-
ing family income and for assigning families               to appropriate-
sized units in federally         subsidized housing projects,          the
Secretary    stated that HUD will        issue strong reminders to
project    owners of their responsibilities          to adhere to occu-
pancy requirements.         Also, he indicated     that,     along with
major organizational         changes now being made in its field
structure,    HUD expects that improved training             and supervi-
sion of its field personnel will provide assurance of more
effective    administration      of the BMIR subsidy programs.

        The organizational      changes and improvements in train-
 ing and supervision       of field personnel cited by the Secre-
tary may result      in more effective    surveillance     of project
practices;     however, we believe that I-IUD should make a
timely evaluation       of these actions to ascertain       whether
they have resulted       in the needed improvements in the ad-
rninistration     of the occupancy requirements       of federally
 subsidized    programs.




                                    26
                               CHARTER3

                  MINIMUM PERCENTAGE-OF-INCOME

               CONTRIBUTION SHOULD BE ESTABLISHED

                  FOR OCCUP~ANCY
                               OF BMIR HOUSING

       HUB has not established     any minimum percentage of in-
come that a family should contribute         for occupancy of the
federally    subsidized housing provided under the BMIR pro-
gram. Other housing programs more recently          enacted by the
Congress require      such minimum contribution.      The minimum
contribution    required under the rental housing assistance
program 3 authorized     by section 236 of the National      Housing
Act, as amended, and under the rent supplement program,
authorized    by the Housing and Urban Development Act of 1965,
both of which are generally       directed   toward families   of
lower income than those of the BMIR program, is 25 percent
of family income.

     Our review showed that more than 60 percent of about
2,500 families  residing  in 25 BMIR housing projects         contrib-
uted less than 25 percent of their    incomes for occupancy of
the housing.   One fifth  of the 2,500 families       contributed
less than 20 percent.    Our analysis was based on the in-
comes reported by the families    in applying for occupancy of
BMIR units and did not include the results       of our test of
the accuracy of the income information      reported.

       We believe that it is inequitable         for HUD to provide
BMIR subsidized housing to families          without   requiring     a
minimum percentag, o-of-income     contribution      by the families
when the Congress has deemed a minimum contribution                appro-
priate   for assistance   under programs for generally           lower
income families.      We believe that an appropriate          percentage-
of-income contribution      should be established        for families
who occupy housing provided under the BMIR program.                 Under
the section 236 program, the maximum rent that a family
would pay for a housing unit under a percentage-of-income
procedure would be the rent that would'be charged if the
housing unit were not subsidized         by the Government.
      Under the BMIR housing program, HUD establishes          a
monthly rent for each housing unit,          which is computed on the
basis of the unit's      prorated    share of the project's   monthly
operating   costs, including      repayment of the GINA mortgage
loan and payment of interest         on the mortgage loan at a rate
ranging from 3 to 3-7/8 percent.           Families that have in-
comes within    the limits    established    for the BMIR program
pay the subsidized     rent for the units that they occupy.

       To receive the benefits    of federally     subsidized hous-
ing under the program authorized      by section 236 of the
National    Housing Act, families   generally    must have annual
incomes (after     certain allowed adjustments)      which do not
exceed 135 percent of the income limits         established   for
low-rent    public housing or 90 percent of the income limits
established    for BMIR housing projects      in the area.

       In determining  whether a family is eligible   for assis-
tance under the section 236 program, HUD permits a $300 de-
duction for each child from the family's     gross income.    Ex-
cluded is all family income which is unusual or temporary,
such as overtime pay which will be discontinued      or unem-
ployment compensation which does not occur regularly.       Such
adjustments    are not permitted by HUD under the BMIR program.

       Under the section 236 program, a basic monthly rent for
housing units is established       on the basis of each housing
unit's   prorated    share of a project's  operating costs, in-
cluding repayment of the mortgage loan and payment of in-
terest   on the mortgage loan computed at a rate of 1 percent.
All interest     costs in excess of 1 percent on the mortgage
loan and HUD mortgage insurance premiums are paid by HUD.

      Families that occupy section 236 housing units and
have adjusted annual incomes which qualify     them for assis-
tance are required    to pay the basic rent for the units or
25 percent of their monthly incomes, whichever is greater;
however, the rent paid by a family cannot exceed that which
would be charged if the unit were not subsidized     by HUD.
Rents collected    by the project in excess of the basic rents
are required    to be paid to HUD for deposit in a revolving
fund for the purpose of making other subsidy payments.



                                 28
      Families that receive assistance        under the rent supple-
ment program, authorized   by the Housing and Urban Develop-
ment Act of 1965, also are required        to contribute     25 per-
cent of their  incomes toward rent.        To be eligible      for rent
supplement assistance,   families     must   have   incomes which    do
not exceed the income limits      established     for low-rent    pub-
lic housing in their areas.

       Because HUD has not established      a minimum percentage-
of-income contribution      for the BMIR program, we believe
that housing assistance      has been provided to families     occu-
pying BMIR units on a more liberal        basis than the Congress
deemed appropriate     under the section 236 and rent supple-
ment programs, although those families         could have incomes
higher than families     that are eligible     for housing assis-
tance under the section 236 and rent supplement programs.

       On the basis of the incomes reported by 2,539 families
that initially    occupied units in 25 BMIR housing projects
located in the areas served by HUD's Boston, Dallas,         De-
troit,   and Fort Worth insuring   offices,   we determined that
over 60 percent of the families     had contributed     less than
25 percent of their incomes for rent of the units and that
about one fifth    of the 2,539 families    had contributed    less
than 20 percent.

         The percentages    of family incomes used for                 payment of
rent     in the 25 projects    were as follows:


                                          Percent of family income
               Proj-                   paid for rent of BkIR units
                ects             Less than 20%     ZO--24%      25% or over
   lo-           re-    Total             Per-             Per-        Per-
  cality       viewed   units
                        -         Units
                                  --           cent   -Units   cent
                                                               ---      Units   cent
Boston            8     1,001      197         19.7     417    41.6      387    38.7
Dallas            4        583      46          8.0     223    37.8      314    53.8
Detroit          12        811     283         34.9     375    46.2      153    18.9
Fort Worth       -1        144      27         18.7     48     33.3      --69   47.9

       Total            2,539      553         21.8   -1,063   -41.8     923    36.4




                                          29
       HUD's current procedures require           that, when the in-
come of a family occupying a unit in a BMIR housing project
is determined to be in excess of the established                limits,  a
surcharge is to be assessed; the surcharge is to be de-
posited by the owner of the project            with GNMA, the mortgagee
that financed the project        by making a mortgage loan at a
lower-than-market-interest        rate.      As stated on page 12,
the maximum surcharge for a BMIR unit is 20 percent of the
rent for the unit occupied.           Additional     rents resulting
from a requirement        that families    contribute     a minimum per-
centage of income for occupancy of BMIR housing would be
equivalent    to rent surcharges and therefore            could be handled
in accordance with HUD's procedures pertaining                to surcharges.




                                    30
PROPOSAL, AGENCYCOMMENTS,AND GAO EVALUATION

       In a draft   of this report,      we stated that we believed
it was inequitable     for HUD to continue to provide BMIR sub-
sidized ho*using to families        without    requiring    a minimum
percentage-of-income      contribution      from the families        when the
Congress had deemed a minimum contribution               appropriate    for
assistance    under other HUD-sponsored housing programs.

      Senate bill   3639 and House bill      16643, which were in-
troduced in the Congress in March 1970, would have provided
for the establishment     of a uniform basis for determining
the amount of housing assistance        provided to families.      One
of the provisions    of this legislation      would have required
that each family pay 20 percent of the first           $3,500 of in-
come and 25 percent of all income in excess of that amount
towards rent.     The legislation    also provided that existing
rents assessed residents       of BMIR projects    were to be ad-
justed over a period of 2 years in accordance with the pro-
posed criteria.

       We proposed to HUD that,       in the event that the provi-
sions of the legislation        which would have required       families
to contribute     a minimum percentage      of their   incomes toward
the rent of federally      subsidized    housing were not enacted
into law during the second session of the 9lst Congress, an
appropriate    percentage-of-income      contribution     be established
for families    who reside in FAIR housing projects.            Subse-
quent to our proposal,       the Congress discontinued       consider-
ation of Senate bill      3639 and House bill       16643 because of
insufficient    time remaining in the legislative          session to
consider in depth the various provisions            of the bills.

        In commenting on our proposal,   the Secretary   said that,
although there have been ample opportunities       since the enact-
ment of the BMIR program in 1961, Congress had chosen not to
amend the legislation     to include such a requirement.       He
further    stated that,  since the BMIR program was being phased
out, our proposal would have impact primarily        on existing
projects    and that these already were subject    to the require-
ment that over-income     families  pay market rents if they wish
to remain as occupants.




                                     31
       The BMIR rent-family   income analysis     shown on page 29
,;Jas based on the incomes reported     by families     in applying
for occupancy of BMIR units and showed that families            with
incomes within    the BMIR limits   could occupy the units with
a lesser percentage-of-income      contribution     than the 25 per-
cent required    under the section 236 and rent supplement
programs.

       We recognize that HUD has established                    procedures     that
require     that tenants of BMIR housing projects                    pay additional
rent when their          incomes increase above the BMIR limits                  and
that,   under HUD procedures,               they would pay rents equal to
HUD's estimate         of the market rents of the units they occupy
if their      incomes are sufficiently               in excess of the limits.
As discussed on page 20,                our   review   of the updated income
information        furnished       to projects       by 63 families     to re-
establish       their    eligibility        for subsidized      rents showed that
21 of the 63 reported              incomes which required          that they pay
rent surcharges.            Of these 21 families,           only nine reported
enough income to require that they pay the maximum surcharge
or market rent referred               to by the Secretary.           Of the 54 fam-
ilies,    that were not required                to pay maximum surcharges         for
units,    49 contributed           less than 25 percent of their           reported
incomes --or an average of 17.5 percent.

      With respect to the Secretary's        comment that the BMIR
program was being phased out and that our proposal would
have impact primarily      on existing  projects,      it should be
pointed out that,    as of June 30, 1970, there were 450 BMIR
housing projects    still   under construction      or for which HUD
had made mortgage insurance commitments.            Also, after  all
BMIR project   construction    is completed,     it appears to us
that it would be reasonable to presume that the occupancy
of BMIR projects    would not remain static        but might experi-
ence considerable    tenant turnover    during the 40-year life
of BMIR mortgage loans.

       Therefore   although the BMIR program is being phased
out as an active HUD program from the standpoint        of making
additional    mortgage insurance commitments, we believe that,
unless the rent for a BMIR unit is based on a percentage
of income--the     maximum rent being HUD's determination    of
market rent--the      BMIR program will continue to provide



                                         32
housing   on a more liberal  basis than federally  subsidized
housing   programs more recently   enacted by the Congress.

MATTERFOR CONSIDERATION BY THE CONGRESS

       The Congress may wish to consider whether HUD should
establish    an appropriate   percentage-of-income    contribution
as the minimum rent to be required        of families  who occupy
the federally    subsidized   housing provided by the sec-
tion 221(d)(3)    program,  the   maximum rent being the equiva-
lent market, or unsubsidized,       rent for the housing.




                                  33
                              CHAPTER4

                         SCOPE OF REVIEW

        Our examination   included a review of the pertinent         leg-
islation    authorizing   the BMIR multifamily     housing mortgage
insurance program, the related      policies    and procedures es-
tablished    by HUD for determining    the eligibility      of families
to reside in assisted housing, and the practices            of BMIR
project    owners and HUD insuring   offices    responsible    for the
administration      of the program.

      We reviewed pertinent       records of HUD insuring   offices
and BMIR projects     relating    to the assignment of housing units
and to the verification        of income data submitted by project
residents,    and we tested the adequacy of HUD's procedures
for obtaining    and verifying      income by comparing income data
submitted   to BMIR projects      by a randomly selected number of
residents   to the income that they reported        to the IRS. We
also discussed the administration         of the program with offi-
cials of HUD and managers of BMIR projects.

       Our review was performed principally        at HUD headquarters
in Washington,    D-C.; at HUD's insuring    offices     in Boston,
Massachusetts;    Detroit, Michigan;   Dallas and Fort Worth,
Texas; at selected BMIR housing projects         located in the areas
served by these insuring     offices;  and at the IRS centers lo-
cated in Andover, Massachusetts;      Covington,     Kentucky;   and
Austin,   Texas.




                                    34
                APPENDIXES




                     35

-   , - --.   -. _
.   .   - _ , _ _   . _ . .   _   . . I   _ _ .   . _ - .   _ . - “ _ - _   . . _ _ .   -
                                                                                   Page 1

            THE   SECRETARY    OF    HOUSING    AND     URBAN     DEVELOPMENT

                                WASHINGTON,    D. C.   20310




                                                                SEP 25 1970
Mr. Max Hirschhorn
Associate Director
Civil  Division
United States General
    Accounting Office
Washington, D. C. 20548
Dear Mr. Hirschhorn:
This is in response to your request of June 9 for our comments
upon your draft  of a proposed report   to the Congress on the
administration  of our interest-subsidy   multifamily  housing oper-
ations.
While the program actually        studied was mainly the below-market-
interest-rate      program under Section 221(d)(3)     of the National
Housing Act, as amended, you are correct         in assuming that some
of the same problems would arise in the newer interest-subsidy
program under Section 236. We are very much aware of these
problems--particularly      those having to do with income and related
conditions    of tenant eligibility--     and are grateful   for the part
that your audit has played in pointing         up these problems.
As you know, the Assistant       Secretary   for Housing Production       and
Mortgage Credit-FHA    Commissioner and the Assistant          Secretary   for
Renewal and Housing Management now share responsibility              in these
programs.    They and their    staffs   are devoting much time and atten-
tion jointly   to the consideration       of various recertification       and
compliance procedures     that may be conducive to higher production
of such housing, while also giving greater          assurance that the
housing will   be available    to occupants at the income level intended
by the Congress.
Your findings and recommendations   have been, and will                          continue      to
be, studied carefully  as these efforts  continue.
Further    and more specific         comments upon major               topics   within   the
draft   report  are offered         below.
Family   Income Data in 221(d)(3)              BMIR Projects
In recognition of occupancy problems relating                         to over-income
tenants and in response to HUD's own surveys                         of BMIR projects.

                                                37
 APPEWDIX I
     Page 2
a new form titled     Maximum Income and Occupancy Limits,         (FHA Form
NO. 1729), was developed and distributed        beginning in 1966.       Its
purpose was,. and is, to provide current       information     on the maximum
income and occupancy requirements      to mortgagors prior       to occupancy
of the projects.      The form also provides     for the mortgagor's
certification    to FHA that it fully    understands     'and assumes full
responsibility     for compliance with those requirements.
With respect to obtaining   and verifying    income data from occupants,
current  procedures as contained   in the Regulatory      Agreement be-
tween HUD and project   owners specify    the obligation    on the owners
to provide leases to each tenant which require         the tenant to certify
his family income and composition     and to agree to recertify     these
items upon request,   or every two years.
Then, three months following            initial     occupancy of a 221(d)(3)
below-market-interest-rate           project,     the directors   of our insuring
offices   are required     to make a spot check in sufficient             depth to
assure that occupancy requirements               have been met.     A similar   spot
check by the insuring        offices      is made after     the two-year recerti-
fication   of tenant eligibility.              Over-income tenants may continue
to occupy units in a project            under this program if they agree to
certain   rent adjustments        that may be required.         The adjusted pay-
ment would be either       120 percent of the BMIR rent or the BMIR
rent plus 25 percent of excess income, whichever is less, except
if 25 percent of the excess is less than $60 a yearp no increase
is required,       In calculating       any such adjustment,      current    community
income levels are to be used.

It also should be noted that beginning with January 1969, FHA re-
quired that BMIR mortgagors       complete a new monthly form (FHA Form
NO.  1709) which lists    data relating    to tenants required   to pay
rents in excess of BMIR rents because of increased incomes.            The
forms provide for the computation        of the excess rents available
for credit   to residual   receipts.     The use of this form does not,
however, eliminate     the need for spot checks of project     records.
It is pointed out that our income certification      forms already
provide for full reporting of all family income, and not just                   that
of the family head as the draft  report   indicates.
Your draft    report,     like HUD's own surveysl    suggested that some
projects   were violating       occupancy requirements,    and as still may be
necessary,    we will     issue strong reminders to project     managements
of their   responsibilities       in this regard.




                                         38
                                                             APPENDIX I
                                                                 Page 3
Assignment   of Proper   Size Units
The draft     report notes that about a fifth      of the units checked
were assigned to families      with less than the appropriate     number
of persons.       However, we permit families    to be assigned to maxi-
mum size units for health reasons or because of family compositiom             1.
Alsol one-person families      can be assigned to one-bedroom units
-when efficiencies     are not available,   subject to transfer   later.

The report does not provide a breakdown to indicate   how many, if
any, of those families  in larger units than scheduled may have
been placed there because of such reasons as mentioned above, or
by special waivers from FHA.
The draft  comments that project     managers and insuring     office
officials  were generally    in agreement with HUD's occupancy objec-
tives but placed a priority     on achieving  and maintaining       full
occupancy of BMIR projects.      After the initial     rent-up  period,
it is not practical   to keep units vacant since the projects            are
dependent on rental   income for successful     operation.     Thus, it is
difficult  to fault  project   managements for maintaining      occupancy
at the highest levels possible,      so long as priorities     were honored
whenever vacancies occurred.
Adjusted Payments Based on Updated         Income Data from Cooperative
Housing Members
The draft   report  states that a number of cooperative      housing
members in BMIR projects      had incomes in excess of BMIR income
limits.    Income data for cooperative     members are obtained as long
as a year or more prior     to occupancy, largely     because of our own
90 percent presale requirement       prior to construction   start.  The
draft   suggests that we should require      project managements to ob-
tain more current    income data just prior to occupancy so that
members' carrying    charges could be adjusted.
There already are provisions     to increase payments by over-income
cooperators.      The Regulatory Agreement provides      for increased pay-
ments pursuant to a plan previously      developed by the mortgagor
and approved by FHA for the collection         and use of such additional
carrying    charges.   The usual plan provides     for recertification
every three years unless required      earlier    by FHA.
With regard to the Section 236 program, provision         for increased
carrying   charges for over-income  families    is included in the
Regulatory   Agreement.  It is specified     in the Occupancy Agreement
that incomes will be recertified    for this purpose at least every
two years from the date of the Occupancy Agreement.




                                      39
  APPENDIXI
       Page 4

In any event, it would be very difficult     to establish    viable
cooperatives  if their memberships were subject to the proposal
contained in the draft     report. With our 90 percent presale
requirement  before construction,   the only practical    time to
obtain income data on which original     membership is based is prior
to the start  of construction.
While over-income     families    could remain members of a Section 236
cooperative   under your proposal,        the imposition  of another income
check would add another unknown for prospective           members and
undoubtedly   diminish   their willingness       to become members and in-
vest their   downpayments without        knowing that they are in fact
to receive the benefits        as anticipated.     The downpayments, of
course, are the working capital          on which the cooperatives   are
dependent.
Establishing    Minimum Percentage    of Income for    Rent under   BMIR
It is contended in the draft    that HUD should not provide subsi-
dized assistance   to families  under the BMIR program without
requiring   them to pay a minimum percentage of their   income for
rent, particularly   when the Congress requires   it as a qualifica-
tion for generally   lower income families  in the rent supplement
and Section 235 and Section 236 programs.
Although there have been ample opportunities          since the enactment
of the BMIR program in 1961, Congress has chosen not to amend
the legislation       to include such a requirement.      As mentioned
above, however, upon recertification         and the finding    that families
are over-income,       we already have made provisions      for their   pay-
ment of the market rents.         Since the 221(d)(3)    program is being
phased out, your proposal would have impact primarily             on existing
projects,    and these already are subject to the requirement           that
over-income     families    pay market rents if they wish to remain as
occupants.
Incidentally,   we favor a provision  of S. 3649, now under consider-
ation,   which would require  that families     pay 20 percent of the
first   $3,500 of income and 25 percent of all income in excess of
$3,500 towards rent and that existing       rents be adjusted over a
two-year period in accord with the proposed criteria.
In general, I might add that, along with major          organization
changes now being made in our field structure,          we expect improved




                                       40
                                                               APPENDIXI
                                                                  Page 5
training    and supervision     as further   assurance   of more effective
administration    of these     programs.
Thank you for   your   assistance     in identifying   * the problems   to be
solved.




                                       41
APPENDIX II
    Page 1
                      PRINCIPAL OFFICIALS

                            OF THE

        DEPARTMENTOF HOUSING AND URBAN DEVELOPMENT

     RESPONSIBLE FOR THE ADMINISTRATION OF ACTIVITIES

                  DISCUSSED IN THIS REPORT


                                            Tenure of office
                                            From            To

SECRETARYOF HOUSING AND URBAN
  DEVELOPMENT(formerly   Adminis-
  trator,  Housing and Home Finance
  Agency):
     Robert C. Weaver                   Feb.   1961    Dec. 1968
     Robert C. Wood                     Jan.   1969    Jan.    1969
     George Romney                      Jan.   1969    Present

ASSISTANT SECRETARY-COMMISSIONER,
  FEDERAL HOUSING ADMINISTRATION
  (formerly  Commissioner, Federal
  Housing Administration)     (note a>:
     Philip N, Brownstein               Mar.   1963    Feb.      1969
     William B. Ross (acting)           Feb.   1969    Sept.     1969
     Eugene A. Gulledge                 Oct.   1969    Nov.      1969

ASSISTANT SECRETARYFOR HOUSING
  PRODUCTION AND MORTGAGECREDIT
    Eugene A. Gulledge                  Nov.   1969    Present

ASSISTANT SECRETARYFOR RENEWAL
  AND HOUSING MANAGEMENT
    Lawrence M. Cox                     Nov.   1969    July    1970
    Norm    V. Watson (acting)          July   1970    Present




                                42
                                                                            .

                                                              APPENDIX II
                                                                  Page 2

                                PRINCIPAL OFFICIALS

                                      OF THE

                     DEPARTMENTOF HOUSING AND URBAN DEVELOPMENT

             RESPONSIBLE FOR THE ADMINISTRATION OF ACTIVITIES

                             DISCUSSED IN THIS REPORT (continued)

aIn November 1969, the position        of Assistant  Secretary   for
 Mortgage Credit-Federal       Housing Commissioner,    was abolished
 and the functions       of the office  were assigned to the Assis-
 tant Secretary      for Housing Production    and Mortgage Credit
  (who also is the Federal Housing Commissioner)         and the As-
 sistant   Secretary     for Renewal and Housing Management.




U.S.   GAO   Wuh.,   D.C.

                                         43