DOCUN!FT RSUM! 07428 - [C2787905 [Implementation of Revise Section 235 Hoeownership Program]. CED-78-16; B-171630. oveaber 23, 1977, 5 pp. Report to Secretary, Department of ousing and Urban Development; by Henry Euchv/ege, Director, Community and Economic Developnent Div. Issue rea: Doestic Hovsing and Community Development: ousing for Low and oderate Income Families (2101). Contact: Commnnity and conomic Development Div. Budget Function: Income Security: Public Assistarete and other Incone Supplements (604); Coaunty and Regional Developsent: Community Developsent (451). Organization Concerned: Depa_:ent of Housing and Urban Developmsoent. Con;ressional Relevance: Ho is Committee on Banking, Finance and Urban Affairs; Senate Committee on Banking, ousing and Urban Affairs. Ar inquiry was con'ucted into the epartwent of Hoasing and Urban Developmentts (HUD:, lmplement-tion of the revised section 235 howeownership program. Since its inception in January 1976, the program has helped only 9,459 hamsobuyers, and only $21.3 million of the total 264.1 million i,, ontract authority has been reserved or obligated. The Oip:'tet's initial goal was to spend the $264.1 illion ov' 3-year period to asist 250,000 to 300,000 homeht .,rs. 2- and There has been little activity in any ajor etropolitan atas although these areas have received relatively large porticuis of tne p:rogram's allocated funds. Although any persons interviewed agreed that the concept of the program is good and that t filli. a need for persons who want to b homeowners but cannot afford a home through conventional eans, ortgagees were the only rhich indicated ome sa t isfaction with the current program group .equireents. The following actions to increase program 'articipation should be considered: lowering the downpayment, increasing the Interest subsidy, cx.tending the lise of the mortgage, aking existing housing eligible nder the program, relaxing the rigid 40% limitation on the number of section 235 homes in a subdivision, ar increasing the ortgage limits. (R S) ,. , ~ U) UNITED STATLES GENERAL ACCOUNTING OFFICE WASHINGTON, D.C. 20548 IN REPLY RER TO, COMMUNTY AND ECCNOMIC DCVELOPMKNT DIVISION B-171630 B~-1716~30 ~NOV 2 3 1977 The Honorable The Secretary of Housing and Urban Development Dear Mrs. Harris: The General Accounting Office has been inquiring into the Department of Housing and Urban Development's implementation of the revised section 235 homeownership program. ecause we understand that the Department is currently looking into possible changes that might be made, we are providing you with the results of our inquiries at this time. As you know, there has been little activity in this program since its inception in January 1976. After 21 months, the program has helped only ,459 homebuyers and only $21.3 million of the total $264.1 million in contract authority has been rserved or obligated. These results compare with the Department's initial goal of spending the $264.1 million over a 2- to 3-year period in assisting 250,000 tr 300,000 home- buyers, and its April 1976 stated goal of providing 110,000 section 235 homes by September 30, 1977. We have also noted that there has been little activity in many major metropolitan areas such as New York City, Chicago, Philadelphia, and Northern New Jersey even though these areas have received relatively large portions of the program's allocated funds and units. Our inquiries were made in the New irk City, Newark, Philadelphia, Miami, Denver, Phoenix, and Salt Lake City areas. In hese areas, we discussed the program with Department officials, builders, mortgagees, realtors, and section 235 participants. We elicited comments on what were considered the good and bad points of the program and specifi- cally what was impeding the program's implementation on a larger scale. Those interviewed agreed that the concept of the program is good and that it fills a need for those individuals who want to be homeowners but cannot afford a home through cnven- tional means. ost, however, believed that adjustments to the program requirements will have to be made if any significant CED-78--16 38207 program activity is to be achieved. Mortgagees were the only group we talked to which indicated some satisfaction with the current rogram reruirements. They believed that iberalizing the progr:m ,,:ould cost them money by increasing the servicing required on program mortgages. NEED FOR r1 C)(CGRAM REVISIONS Whije not all those interviewed agreed as to the extent that the program requiremernts should be liberalized, most agreed ~th: Lhe following actions would increase program participatin and should be considered: -- Lowering the downpayment. -- Incrasing the interest subsidy. -- Extending the life of the mortgage. -- Vtking existing housing eligible under the pr og r am. -- Relaxing the rigid 40-percent limitation on the number of section 235 homes in a subdivision. -- Increasing the mortgage limits. The first three of these actions address the need to make it easier financially for prospective section 235 homebuyers to participate in the program while the last three deal with increasing the supply of available sec:tion 235 housing. Increasing the demand The dowrpayment currently required under the revised section 235 program is the same or higher than that required of a nonsubsidized purchaser under the regular Federal Housing Administration section 203 program. Although the downpayment computation is the same under both programs (3 percent of the first $25,000 plus 5 percent of the amount over $25,000), the fact that the section 235 program has lower mortgage limits than section 203 ($38,000 or $44,000 vs. $60,000) causes the section 235 homebuyer to pay a greater downpayment for certain homes costing more than the mortgage limits for section 235, than would a section 203 homebuyer purchasing the same or smilar priced home. 2 Most Department field office officials, builders, mortgagees, and realtors we interviewed believed that the homebuyers should have enough equity in their homes to feel financially obligated to become successful homeowners. The amount considered adequate generally ranged from a flat $1,000 investment to a straight 2 or 3 percent downpayment. The interest subsidy under the revised program may be too low to allow many people to participate. The fa;t that program participants must pay at least a 5 percent interest rate on their mortgagees seems to limit the program to persons residing in areas where income is relatively high and housing costs are relatively low. A homebuys. must meet the Department's underwriting criteria which limits his mortgage payment to 35 percent of income and all fixed debts to 50 percent of income. With the higher morcgage limits of the recently enacted Housing and Community Development Act of 1977, increasing building costs, and the builders' natural inclination to build the most expensive houses the market will bear, the population of those .families eligible and financially capable of participating in the program will become ev?n smaller in some areas and probably nonexistent in others. Two likely solutions to this problem are to increase the interest subsidy and/or extend the life of the mortgage. Most of those we talked to f -ed a pogram interest rate 2 to 4 percent lower than it . now. Some also favored extending the repayment period for the mortgage from O to 35 or 40 years. Either or both of these changes would make more people eligible r the program by lowering their m.nthly mortgage payments. Increasing the supply Existing housing represents a potential supply of nousing for the section 235 program. In recent years, 4 to 5 existing home. have been sold for every new one. Also, the median price of existing sales has been about $4,000 less than for new homes. The inclusion of existing homes in the section 235 program, however, poses soime problems for the Department, especially in the area of administrative control. Given the experiences of the original section 235 program, homes would probably have to be inspected (not just appraised), the act.,ities of realtors and repair contractors suspected of less than adequate performance would have to be carefully monitored, and the Department would have o closely supervise its own employees to insure the integrity of the program. 3 Department officials in the field offices we visited ·agree that many of the problems of the A: 'sting housing portion of the original program were he !'ault of administrative failure and not the fdult of the program participants. Most, however, believe their offices are now ready and able to do d good job administering existing housing for section 235 if the Department cooses to return this source of homes to the program. The 40-percent limitation on the number of section 235 homes in a subdivision is an irritant to builders. Their principal complaint is with the rigidity of the 40-percent limitation. Given a hypothetical situation h'bere a builder sells 40 homes through section 235 and 40 homes by other means i a 100 home subdivision, the bui3lers say it. is unfair for them to have to turn away a ectioa 235 buyer who wants one of the remaining homps. Thel believe that mix of income groups could be achieved in a subdivision without rigid limits and without the prospect3 of penalties oeing imposed on builders. We recognize hat the 40-percent limita- tik)n is now law, but believe that the Dpartment should study fl.rther its merits and necessity in accomplishing intended objectives. Mortgage limits that are too low impact negatively on the supply of housing produced under a program. In the areas we visited where there has been little program activity, one of the overriding reasons was that the program's low mortgage limits were inconsistent with the overall cost of housing in those areas. Builders very simple, could not afford to build houses with selling prices approximating the program's limits. We believe that the increased section 235 mortgage limits in the Housing and Community Development Act of 1977 will, except in the highest cost areas, increase the number of builders willing and able to participate in the program and thereby help to increase the supply of housing available under the program. To get the revised section 25 program moving at a rate consistent with Department stated goals, it appears to us that additional c-.oges will have to be made to some of the program's requirements. The program must be attractive to builders and mortgagees who have influence over the supply of housing pro- duced under the program. On the other hand, it must be at- tainable by a targetable population which needs the program's 4 assistance and is financially capable of participating. Changes to the supply or demand side of the program alone will do little to stimulate program activity. A combina- tion of well thought out changes to both.sides of the picture should help to produce a much more viable home- ownership assistance program than what exists today. It should be recognized hat these are the views we obtained as a result of cur inquiries, and that these views are presented for your cnsideration now because of the pending decisions to be made on the future of the section 235 program. We would be pleased to discuss these matters further with you or your staff. Copies of this letter are being sent to the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Banking, Finance and Urban AfFairs. We are also sending copies to your Assistant Secret, ry for Housing-Federal Housing Commissioner and Inspector General. Sincerely youlrs, Henry Eschwege Director 5
Implementation of Revised Section 235 Homeownership Program
Published by the Government Accountability Office on 1977-11-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)