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)

                            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
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)
                                WASHINGTON, D.C.   20548

                                                           IN REPLY
                                                           RER TO,


      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
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.


     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

           -- 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.

     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.

      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

     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

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