Federal Housing Administration (FHA) insuring office
in Seattle, Washington, to determine whether its practices in the sale
of acquired single-family properties were contributing to the higher
average loss on sales in the State of Washington than that experienced,
nationwide, by FHA. Also, as subsequently discussed with you, we have
given consideration to whether the losses incurred by the Seattle
insuring office were attributable, in part, to the practice of making
extensive repairs to the acquired properties.
The primary function of FHA, an agency of the Department of Housing
and Urban Development (HUD), is the administration of mortgage loan
insurance programs authorized by the National Housing Act, as amended
(12 U.S.C. 1701 et sea.). When an FHA-insured mortgage loan is terminated
for default, the mortgagee may transfer the collateral property
to FHA in exchange for payment of the outstanding balance of the mortgage
loan and related acquisition costs. FHA procedures provide that
such properties be sold as promptly as possible at the highest price
consistent with the current sales market.
The profit or loss on the sale of acquired properties represents
the difference between the sale proceeds and the costs incurred by FHA
for payment of the mortgagee's claim and for the maintenance, repair,
and sale of the property. As of June 30, 1969, the total income
received by FHA from assessment of premiums for insured mortgage loans
on single-family properties and from fees, investments, and other'
sources had been sufficient to cover its expenses connected with the
management and disposition of acquired single-family properties.
In our review, we compared the practices of the FHA insuring office
in Seattle with those of three FHA insuring offices in adjacent areas-
Boise, Idaho; Portland, Oregon; and Spokane, Washington--because the
losses incurred by these offices were substantially less than those
incurred by the Seattle office. In our view, such a comparison should.
indicate whether the higher loss experience of the Seattle office was
attributed primarily to its practices or to other factors beyond its
control.
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Of the 39 counties in the State of Washington, 22 are located
within the jurisdiction of the Seattle office and include the cities
of Seattle and Tacoma, 14 are located in the area of the Spokane
office, and three are located in the area. of the Portland office.
The areas served by the Portland and Spokane offices also include
some counties in Oregon and Idaho, respectively. Most of the home
properties sold by FIA in the State of Washington in 1969 were located
in the 22-county area of the Seattle office.
As part of our review, we examined the sales records for 53
properties sold by the Seattle office, 14 properties sold by the
Boise office, 16 properties sold by the Portland office, and seven
properties sold by the Spokane office during the 6 months ended
December 31, 1969. The information obtained during our review is
presented below.
Data obtained from HUD's records of property sales showed that
FHA incurred an average loss of about $3,200, nationwide, on the sale
of about 11,300 acquired single-family properties during the 6-month
period ended December 31, 1969. The average loss of the Seattle
office was about $4,500, or about 41 percent higher than the national
average. The following table shows the number of properties sold and
the average loss incurred by the Seattle, Boise, Portland, and Spokane
offices for the 6 months ended December 31, 1969.
Properties sold
Insuring office • Number Average loss
Seattle 224 $4,500
Boise 17 2,600
Portland 60 2,500
Spokane 43 2,500
FIIA records for the property sales we examined in the four offices
showed that certain conditions existed which tended to explain why
losses in the Seattle office were higher than those of the other three
offices..
The largest average cost item connected with the sale of an
acquired property, other than the payment of the mortgagee's insurance
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claim, was for repairs. FHA instructions provide that:
"***properties to be offered for retail sale shall include
all repairs necessary to create maximum sales appeal and to
eliminate existing or potential structural, mechanical and
other deficiencies and in addition thereto such upgrading
which because of type and location of the properties the
director (of the insuring office) determines is necessary
to generate sales, or to stablize or improve neighborhoods."
Officials at the Seattle office told us that, in accordance with
these instructions, the extent of repairs to a property was determined
on a property-by-property basis. Information in the sales records for
the 53 properties that we reviewed at the insuring office tended to
support this statement. These records showed that repair costs ranged
from about $160 to $7,800 a property and averaged about $3,300.
According to the records we examined at the four offices, the
amount of repairs generally increased with the age of the property,
as shown in the following schedule.
Average repair'costs
Age of property Seattle Boise Portland Spokane
Less than 10 years $1,536 $1,907 $1,024 (a)
10 to 20 years 2,825 2,475 2,161 $2,823
21 to 40 years 3,555 3,060 2,124 3,360
Over 40 years 5,626 3,822 4,196 (a)
No properties of this age were included in our test of property records.
Our examination of selected property sales also indicated that about
55 percent of the properties sold by the Seattle office were over 20
years old, whereas only 38 percent of the properties sold by the Boise,
Portland, and Spokane offices were over 20 years old.
Most of the properties included in our review at the Seattle insuring
office were located in the Seattle-Tacoma area. An insuring office
official stated that labor and material'costs were higher in that area
than in the surrounding areas. Data we obtained from the Bureau of
Labor Statistics showed that the pay scales for building trades involved
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in home repair were generally higher in the Seattle-Tacoma area than in
the Boise, Portland, or Spokane areas. Also, information obtained from
HUD showed that construction costs. were higher in the Seattle-Tacona
area than in Boise, Portland, or Spokane..
Although the generally higher labor and material costs in the
Seattle-Tacoma area seemed to be a contributing factor to the higher
repair costs of the Seattle office, our examination indicated that more
significant factors were the greater percentage of older properties sold
by the Seattle office and the generally greater repair costs incurred
for these properties. Because the repair work had been completed and
the properties had been sold at the time of our review, we did not
attempt to determine whether the repairs made to the properties were
more extensive than those suggested by the FHA guidelines.
The average sales expense incurred by the Seattle insuring office
was higher than that incurred by the Boise, Portland, and Spokane offices.
The higher sales expense of the Seattle office appeared to be principally
attributable to the payment of discount points in connection with a substantial
number of sales which had been financed by private lenders
rather than by the Government National Mortgage Association (GWNA).
Sales financed by GNMA did not involve the payment of discount points.
During the 6-month period ended December 31, 1969, about 67 percent
of the properties sold by the Seattle insuring office were financed by
private lenders, whereas only 33 percent of the properties sold by the
Boise, Portland, and Spokane insuring offices were financed by private
lenders. The remaining sales generally were financed by GNMA or did
not involve mortgage financing. For the property sales we examined at
the Seattle office, the discount rates applicable to privately financed
mortgage loans ranged from 4 to 5-1/2 percent of the mortgage loan
amount and averaged about $700 per property.
An official at the Seattle insuring office advised us that the
practice of placing mortgages with private lenders rather than with
GNMA was in accordance with instructions from HUD headquarters in
Washington, D. C. In this regard, the FHA instructions state that GNMA
financing will be permitted only after diligent efforts have been made
to obtain private financing.
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We did not obtain formal written comments from officials of the
FHA insuring offices; however, the information contained herein has
been discussed with them and is based primarily on information available
in FHA files or otherwise furnished by FHA officials.