Enactment of the proposed Housing and Urban Development Act
of 1970 (S. 3639, 91st Cong., 2d sess.) would establish a subsidized
multifamily housing program, patterned after section 236 of the National
Housing Act, that would replace the present rent supplement
program. The proposed legislation would also establish eight mortgage
and loan insurance programs- - replacing the various insurance
programs authorized by the National Housing Act- - which would be serviced
by two of the four existing insurance funds administered by the
Department.
In addition, the proposed legislation would standardize the basis
for determining income eligibility for the federally subsidized housing
programs to be established by the proposed legislation.
Although we have not obtained written comments of the Department
on the contents of the enclosures, we have discussed the contents
with appropriate Department officials and have considered their views
in the final preparation of this report.
As agreed by the staff of your Subcommittee, we are making
copies of this report available to the Secretary of Housing and Urban
Development.
GENERAL ACCOUNTING OFFICE
COMMENTS ON SELECTED ASPECTS OF THE
RENT SUPPLEMENT PROGRAM
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
INTRODUCTION
The Housing and Urban Development Act of 1965 (12 U.S.C.
1701s) authorized a program of Federal rent supplements to
enable private enterprise to provide housing for low-income
people. The housing, whether acquired through rehabilitation
of existing structures or through new construction, must be
approved for mortgage insurance by the Department of Housing
and Urban Development (HUD) under section 221(d)(3) of the
National Housing Act (12 U.S.C. 1701 et seq.) at marketinterest
rates, except for a limited number of projects authorized
for mortgage insurance at below-market-interest
rates.
During our review, we examined the administrative policies,
procedures, records, and files of HUD and the project
sponsors and had discussions with their representatives and
with various project management officials. The review was
performed at HUD headquarters in Washington, D.C.; at HUD
regional offices in Chicago, Fort Worth, Philadelphia, and
San Francisco; and at selected HUD insuring offices and
locally sponsored rent supplement projects, and it included
an examination of 20 market-interest-rate projects administered
by the above HUD regional offices. At the time of our review
(June 1969), 134 market-interest-rate projects were in operation
nationwide.
Rent supplement payments for fiscal year 1969 totaled
about $5.7 million, of which $650,000 applied to the 20 projects
covered in our review. Not all the 20 projects had been
in operation the full year. Total annual payments for the
20 projects will be about $1 million.
ENCLOSURE I
Page 2
LIMITED ACHIEVEMENT OF ECONOMIC INTEGRATION
One of the major goals to be achieved under the rent'
supplement program has been the integration o low-income
tenants receiving Federal rent supplements 4oxt higher income
tenants paying the full rent, referred to as economic integration.
Our review of congressional hearings indicated that
a substantial number of units in rent supplement projects
would be occupied by tenants paying the full rent.
Our review revealed that economic integration was not
being achieved in eight of the 20 projects and was being
achieved only to a limited extent in the remaining 12 projects.
A total of 886 units were available for occupancy in
the 12 projects but only 45 (about 5 percent) were occupied
by tenants paying full rent. In the eight projects, 649 of
the 677 units were occupied by tenants receiving rent supplements;
the remaining 28 units were not rented.
As a further indication of the degree of economic integration
being achieved or planned, the latest available HUD
statistics showed that, as of early fiscal year 1970, 99.6 percent
of the dwelling units in the 185 market-interest-rate
projects under rent supplement payment were occupied by tenants
receiving rent supplements. For an additional 470 projects
for which rent supplement funds had been reserved,,
99.2 percent of the planned units were designated and approved
by HUD for occupancy by tenants receiving rent supplements.
Such a designation, which is used as a control over rent
supplement funds, is used to determine the maximum rent supplement
payments HUD would be obligated to pay if all units
so designated were actually rented to tenants receiving rent
supplements. The designation, therefore, does not preclude
project sponsors from renting units to tenants capable of
paying the full rent.
On the basis of the tenant composition in the 20 projects
included in our review, the designations for the 470
projects appeared to be generally representative of the actual
tenant makeup of the projects for which rent supplement
payments were being made.
ENCLOSURE I
Page 3
In HUD's fiscal year 1969 appropriation hearings, HUD
officials stated that economic integration in rent supplement
projects should be accomplished over a period of several
years through increases in the incomes of project tenants who
may elect to remain in the project even though no longer eligible
for rent supplement assistance.
Project sponsors and HUD officials told us, however,
that a substantial number of the tenants of rent supplement
projects were receiving welfare, social security, or other
forms of assistance and had little potential for reaching
higher income levels. HUD statistics showed that, as of December
1969, the primary source of income of approximately 58
percent of tenants receiving rent supplements was derived
from such assistance payments; the primary source of income
for approximately 42 percent of these tenants was salary and
wages. The average annual income for all tenants receiving
rent supplements was $2,350. We were told that, in selecting
tenants for rent supplement units, consideration generally
was not given to prospective tenants' potential for increasing
their income.
Our test of income sources for 469 tenants receiving
rent supplements in seven of the 20 rent supplement projects
included in our review showed that 217 tenants were welfare
recipients, 101 were receiving social security benefits or
other assistance, 122 were employed, 21 were employed and
also receiving assistance, and eight had other sources of income.
The average total annual income, including assistance
payments for 442 of the 469 tenants, was $4,000 or less. Of
the 143 tenants who were employed, including those who were
also receiving some form of assistance, 124 had annual incomes
of $4,000 or less and over half had incomes of $3,000
or less.
A further test covering two projects where 60 recertifications
of tenant income had been completed showed that, of
44 tenants receiving welfare assistance at initial occupancy,
43 were still receiving welfare assistance 1 year later. Of
the remaining 16 tenants who were employed at initial occupancy,
15 were employed 1 year later--one became unemployed
and went on welfare.
ENCLOSURE I
Page 4
Since many tenants receiving rent supplements are receiving
welfare or other forms of assistance and since, in selecting
tenants, consideration is not given to prospective tenants'
potential for increasing their incomes, it appears to
us that it will be difficult for tenants receiving rent supplement
payments to raise their incomes to a level where rent
supplement payments will be substantially reduced or eliminated.
When we discussed the objective of economic integration
with HUD regional officials and with project sponsors and
managers, many of them expressed the opinion that economic
integration would be difficult to achieve and that the limited
number of tenants then paying the full market rent in
rent supplement projects would reside there only until other
suitable housing became available. Various reasons were
given to us as to why economic integration would not be
achieved to any significant extent--the most frequent reason
was that people of higher income who could choose the neighborhoods
in which they wished to reside preferred not to live
in rent supplement projects.
Also, in several areas where rent supplement projects
were located, our review showed that housing units were renting
on the regular commercial market at rates comparable to
or less than the full market rental rates approved by HUD for
rent supplement projects. For example, in Atlantic City, New
Jersey, a commercial apartment project was renting one-bedroom
air conditioned units at monthly rates ranging from $120 to
$125 while the rental rate for a one-bedroom rent supplement
unit (not air conditioned) ranged from $127 to $131.
A management official of a rent supplement project in
New Mexico stated that regular standard housing, comparable
to rent supplement housing, generally rented at lower rates
than those charged for rent supplement units. A project
sponsor in California advised us that individuals could find
regular standard housing in more desirable locations at rates
comparable to the rental rates of rent supplement projects.
A HUD official told us that differences in prevailing
rents for housing projects could be attributed to a variety
of factors and could depend to a large extent on the level of
ENCLOSURE I
Page 5
construction costs and financing costs prevailing in the area
at the time a project is developed.
Matters for consideration of the Committee
In view of the foregoing information, we believe that,
if the objective of economic integration is to be achieved in
the rent supplement program, the Committee may wish to explore
what steps would be appropriate to promote such an objective.
Under the proposed housing act of 1970 (S. 3639, 91st
Cong., 2d sess.), HUD would be prohibited from entering into
new contracts for rent supplement payments. Instead, section
502 of the proposed legislation would establish a new
subsidized housing program, patterned after the housing assistance
program presently authorized by section 236 of the
National Housing Act, under which the Secretary of HUD would
be authorized, for the purpose of reducing rentals for lower
income tenants, to make periodic assistance payments to mortgagees
on behalf of the owners of multifamily housing projects.
If the Committee believes that economic integration
should be promoted in the proposed section 502 program, it
may wish to explore what steps would be appropriate in light
of the experience encountered under the rent supplement
program.
ENCLOSURE I
Page 6
LIMITED USE OF PROGRAM IN MAJOR URBAN CENTERS
When the rent supplement program was enacted into law in
1965, it was described by the Administration as "the most crucial
new instrument in our effort to improve the American
city."
At the time of our review (June 1969), there were no
market-interest-rate rent supplement projects in operation in
such major urban centers as Chicago, Detroit, and Philadelphia;
and a total of three projects providing 230 units were
in operation in the Los Angeles and San Francisco areas. HUD
officials advised us that, as .of September 1969, there were
two projects with 525 units under payment in Detroit; four
projects under contract in both Philadelphia and Los Angeles;
and one project under contract in San Francisco. Greater use
of the program was being made in two other major urban centers--
Cleveland and Dallas--where approximately 1,800 rent supplement
units were being constructed in poverty areas, in inner
city blighted areas, and within the general vicinity of the
urban centers. As of September 1969 there were 185 rent supplement
projects under payment having a total of about 17,000
units.
Because of the limited amount of construction of rent supplement
projects in highly urbanized areas, the program has not
been effective in helping to meet low-rent housing needs. HUD
regional officials stated that it was HUD policy to provide as
wide a geographic distribution of these projects as possible
and to locate projects in small towns and rural areas to the
extent possible, particularly in those areas not served by
public housing, so that the program would serve all the people
who were in need, not just those residing in urban areas.
HUD regional officials and project sponsors explained that
the limited extent of program participation in major urban areas
was attributable to such things as (1) the scarcity of land in
parcels large enough to attract adequately qualified sponsors,
(2) high land and construction costs, coupled with maximum
rental rates that make construction of projects in certain areas
financially infeasible, (3) the lack of tax abatements or land
value write-downs, (4) the reluctance of potential sponsors to
ENCLOSURE I
Page 7
become involved in the administrative procedures required to
take advantage of Federal housing programs and to become involved
in the sociological problems inherent in the management
of this type of project, and (5) the high rate of crime.
HUD regional officials stated that, in the Cleveland area,
local participation had been good primarily because of the interest
and work of church organizations to better the living
conditions of inner city residents and because neither the cost
nor the availability of land had been major impediments. They
stated also that, in the Dallas area, sponsor participation had
been excellent because the cost of construction in the urban
areas was no higher, and was sometimes less, than in areas less
heavily populated.
According to several sponsors, more rent supplement projects
could be constructed in urban centers if the projects
could be located on urban renewal land. Title I of the Housing
Act of 1949, as amended (42 U.S.C. 1450), provides that,
upon approval of the Secretary of HUD, any real property held
as part of an urban renewal project may be made available for
new or rehabilitated housing for individuals of low or moderate
income. In addition, HUD's regulations provide for selling
such land at prices which would be attractive to sponsors of
rent supplement projects.
A HUD quarterly report (first quarter of fiscal year 1970)
on the rent supplement program showed that a small percentage
(about 10 percent) of rent supplement projects in operation
were located in urban renewal areas.
Matters for consideration of the Committee
We believe that, to encourage the development of rent supplement
projects in major urban centers, consideration should
be given to making greater use of urban renewal land. We believe
also that maximum rental rates for rent supplement projects
should be established on the basis of the income needed
to make development of_a project financially feasible in a
paricular area. The Committee may w~ sh- avet-e Secretary
of HUD take action along these lines to help make the rent supplement
program more effective in improving the American city.
ENCLOSURE I
Page 8
Under proposed housing legislation of 1970, the rent supplement
program would be replaced by a subsidized rental housing
program (section 502) patterned after the program presently
authorized by section 236 of the National Housing Act.
If enacted, section 502 should help to promote the construction
of privately owned projects for low-income people in
large urban centers because the HUD-approved maximum rents
are to be representative of the fair market rental rates that
would make the construction of such housing projects financially
feasible in the particular area involved. The Committee
may wish to have this proposed section also provide for
greater use of urban renewal land for such housing projects.
ENCLOSURE I
Page 9
LIMITED ACCOMMODATION OF LARGE LOW-INCOME FAMILIES
Construction of units with four or more bedrooms was lim-.
ited or nonexistent in market-interest-rate rent supplement
projects. For areas under the jurisdiction of HUD's Los Angeles,
San Franciso, and Cleveland insuring offices, where
HUD regional officials generally acknowledged a need for larger
units, of a total of 3,684 rent supplement housing units occupied
or under construction as of June 30, 1969, 92 contained
four or more bedrooms. Also, no units of this size had been
constructed under the program in the area of the Detroit insuring
office, although HUD regional officials agreed that
there was a definite need for such larger units.
HUD regional officials and project sponsors stated that
the primary reason that housing units containing four od more
bedrooms were not being planned or constructed was thatnhigher
construction costsC-oupled with HUD's nationwide limit on the 7
maximum rent that could be charged for such units, made the
construction of larger units in rent supplement projects financially
infeasible.
In May 1966, HUD issued instructions relating to maximum
monthly rentals for living units in rent supplement projects.
The instructions provided that the maximum monthly rentals
for thr_ or more bedroom units would be $140 with the provision
that in high cost areas the maximum rentals could be
increased by up to 25 percent. Under these rental rates,
four-, five-, and six-bedroom units were subject to the same
maximum monthly rate as three-bedroom units which were less
costly to construct.
The maximum monthly rental rates have since been increased
and, starting in early fiscal year 1969, a higher maximum rental
rate was established for four-bedroom units than for threebedroom
units. However, four-, five-, and six-bedroom units
still have the same maximum monthly rental rate ($177), which
could be increased by 25 percent in high cost areas. It appears
that the additional costs of constructing five- and six-bedroom
units, without corresponding increases being allowed in applicable
rental rates, would continue to discourage the construction
of such units. According to HUD officials, the Department
is currently reviewing these limits in light of construction
cost increases since the present limits were established.
ENCLOSURE I
Page 10
Other factors which HUD regional officials and sponsors
said tended to discourage the construction of larger units
were (1) the difficulty of designing a structure to include
larger units, (2) the space required, (3) the fact that larger
units generally result in higher maintenance costs, and (4)
the reluctance to locate a number of large families in one
building.
A HUD regional official stated that the program was serving
the largest population segment by providing projects of
three bedrooms or less. Some officials stated that the housing
needs of large low-income families were being provided in
leased single-family dwellings or in public housing projects
designed for larger units.
Matters for consideration of the Committee
We believe that, if larger dwelling units are to be constructed
under the program, the maximum rental rates established
by HUD for larg size units smensurately
greater than those for smaller size units. The Committ;e
may wiseio5t7have the Secretary of HUD provide for more flexibility
in the establishment of allowable maximum rents under
the rent supplement program so that construction of dwelling
units for larger families will be encouraged.
Under title I of the proposed housing act of 1970, the
Secretary of HUD would establish the development cost for
different sizes of homes and multifamily dwelling units in
each housing market area. The development cost would be determined
by establishing for each housing market area the
"total construction cost" of a standard-sized new singlefamily
home and a standard-sized dwelling unit in a new multifamily
structure on the basis of plans and specifications for
modest dwellings.
On the basis of these determinations, the Secretary would
establish the total construction cost of various sizes of
dwellings (more or fewer bedrooms). The total construction
cost of the various sizes of dwellings would then be increased
by the same percentage as that which the average cost of land
and site improvements in the area bears to the total construction
cost for similar sizes of homes and multifamily
ENCLOSURE I
Page 11
units in the area. Therefore, it appears that construction
of larger units will be financially feasible since the total
construction cost of such units will be representative of the
costs in the area in which the projects are to be constructed.
Also, title V provides that, for each dwelling unit in
an assisted project, a "basic rental" be established based on
the costs of operating the project with the benefit of assistance
payments attributable to the unit. The tenant would
pay the basic rental for his unit or such greater amount not
exceeding the fair market rental for such unit (the rental
without subsidy).
The proposed bill also provides that up to 20 percent of
the total amount of contract authority authorized by appropriation
acts could be used for special projects in which all the
units would be subsidized. These would be comparable to rent
supplement projects under the present law. In such projects,
payments equal to the difference between the sum of the monthly
economic rent required for each unit in the project and the
sum of the monthly basic rental established for each unit in
the project would be made to the mortgagee. It appears,therefore,
that some of the projects would enable sponsors to receive
full economic rental and would enable low-income tenants
to afford larger units.
We believe that, if enacted, the above proposed sections
should help promote the construction of dwelling units for
larger low-income families.
ENCLOSURE II
Page 1
GENERAL ACCOUNTING OFFICE
COMMENTS ON THE FINANCIAL CONDITION OF
INSURANCE FUNDS ADMINISTERED BY THE
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
INTRODUCTION
The four insurance funds maintained by the Department of
Housing and Urban Development (HUD) have been authorized by
the National Housing Act (12 U.S.CO 1701 et seq.) for the purpose
of conducting the numerous mortgage and loan insurance
programs under which lending institutions are insured against
losses on first mortgages and loans made to qualified borrowers
(mortgagors) for various types of housing and home improvements.
These funds arethe Mutual Mortgage Insurance
Fund the General Insurance undYthe Cooperative Management
Housing Insurance Fund, and3the Special Risk Insurance Fund.
From inception of the mortgage and loan insurance programs in
1934 to June 30, 1969, about $132 billion of insurance had
been written, and about $63 billion of that amount was in
force at June 30, 1969.
The insurance funds are charged with the administrative
expenses of the insurance programs, the insurance claims of
lenders arising from mortgage and loan defaults, and an allowance
for estimated future losses on disposal of property and
notes acquired and on hand. The funds are credited with income
from insurance premiums, fees, investment income, and
the proceeds from sales and rentals of acquired properties and
sales of notes. The accumulated differences between the income
of the funds and the expenses charged against the insurance
funds are considered to be the insurance reserves available
to cover future losses and administrative expenses. The
combined total of net insurance reserves of the four insurance
funds at June 30, 1969, was about $1.4 billion.
In determining the adequacy of its insurance reserves,
HUD estimates, on the basis of actuarial studies of the risks
underwritten, the probable future losses and related expenses
for outstanding mortgages and loans that might be incurred if
ENCLOSURE II
Page 2
an economic reversal of depression magnitude were to develop
immediately. HUD considers that an insurance fund is actutarially
sound when the reserves are equal to, or greater than,
the estimated reserve requirements for outstanding mortgages
and loans.
FINANCIAL CONDITION OF INSURANCE FUNDS
The following table shows, for the four insurance funds
combined, the estimated reserve requirements, the insurance
reserves, and the estimated reserve deficiencies as of
June 30 for the past 6 years.
Estimated
reserve Estimated
requirements Insurance reserve
Year (note a) reserves deficiencies
(000,000 omitted)
1964 $1,400 $1,120 $280
1965 1,520 1,130 390
1966 1,670 1,130 540
1967 1,700 1,180 520
1968 1,780 1,260 520
1969 1,910 1,400 510
aExcludes reserve requirements for below-market-interest-rate
mortgages insured under section 221(d)(3). Premiums on these
mortgages have been waived by HUD, and the General Insurance
Fund is to be reimbursed from appropriated funds for any net
losses.
The financial condition--estimated reserve requirements,
insurance reserves, and estimated reserve surpluses or deficiencies--
for each of the four funds as of June 30, 1969, was
as follows:
ENCLOSURE II
Page 3
Estimated
Insurance reserve
Estimated reserves or surpluses or
Insurance reserve negative reserve
fund requirements reserves(-) deficiencies(-)
(000,000 omitted)
Special Risk $ 20 $ -1 $ -21
Cooperative Management
21 23 2
General 4 9 7a 196 -301 a
Mutual Mortgage 1,368 1,176 -192
aExcludes reserve requirements of $134 million for belowmarket-
interest-rate mortgages§insured-under section 221(d)(3).
Special RiLsk Insuran e`Ff Fn nd O
Established in 1968, '>his fund services mortgages insured
pursuant to section 223(e), or insured under sections 235
236, and 237 of the National Housing Act. These program generally
include the insurance of mortgages for families/of low
or moderate income, families who are poor credit riSks, or
families purchasing properties in older, declining urban areas.
Because of the unusual risksi-fufsie djt-he-ci aa sur -
ance Fund was not intended ~t actuarially sound and ws authorized
by law to receive appropriated funds to cover program
losses. As of June 30, 1969,he fundd had ak ois.egative
insurance reserve) of about $1 million; however, no appropriated
funds have been received or requested by HUD to cover
this loss.
Cooperative Management Housing Insurance Fund
Established in 1965 to administer management-type cooperative
housing projects insured under section 213 of the National
Housing Act, this fund had about $23 million in insurance
reserves as of June 30, 1969, of which about $2 million
was in excess of HUD's estimated reserve requirements. In
1970 HUD distributed in dividend payments about $1.6 million
of the surplus reserves to some 380 cooperative projects,
ENCLOSURE II
Page 4
General Insurance Fund
Established in 1965 to consolidate the operations of 14
separate insurance funds, this fund services 34 separate
mortgage and loan insurance programs authorized by the National
Housing Act, These programs include 12 home programs,
16 multifamily housing programs, 4 property improvement programs,
a group practice facilities program, and a land development
program.
Because of operating losses during the 6 years ended
June 30, 1969, insurance reserves in the fund, or the 14 predecessor
funds, decreased froni $363 million to $196 million
while estimated reserve requirements--exclusive of the requirements
for the below-market-interest-rate mortgages insured
under section 221(d)(3)--increased from $388 million to
$497 million. This increased the reserve deficiency from
$25 million to $301 million, or 7 percent of the reserve balance
to 154 percent.
In connection with the housing legislative proposals for
1967, your Committee requested HUD to furnish the Committee
with a report on the soundness of HUD insurance reserves.
Your Committee had expressed concern over the rising insurance
losses in recent years and the widening gap between available
reserves and reserve requirements, which seemed to be related
to the insurance of high-risk mortgages. In a May 1967 letter .4
to the Committee, HUD stated that reductipon. of. the_ gap between P'i
reserves and estimated reserve requirements would depend on nI
the relationship between future income and future expenses
and-losses. HUD stated also, with respect to the adequacy of
premiums for individual programs, that a detailed study of
insurance costs by program was under way and that from this
study judgments of the adequacy of individual program premiums
might be possible. 2
The study to which HUD referred in its May 1967 letter
to the Committee showed that a progressive decline had occurred
during fiscal years 1960-66 in the level of net income
from insurance operations after payment of operating expenses
and establishment of an allowance for estimated losses on acquired
properties and notes on hand. The decline in net income
was attributed by HUD to a combination of factors
ENCLOSURE II
Page 5
including (1) successive liberalizations of loan-to-value ratios
for both home and project mortgages, (2) extension of
mortgage insurance to new programs (nursing homes, housing
for the elderly, housing in urban renewal areas, housing for .
displaced families, etc.), (3) recession conditions in 1960-
61, and (4) adverse developments in individual local economic
housing situations, The HUD study concluded that sufficient
experience had been gained since 1960 to suggest a high probability
that premium rates were toolow in both home and
multifamily-housing mortgage insurance programs to ensure the
self-sufficiency of HUD's combined insuring operations over
an extended future period.
The HUD study showed also that operating costs for most
home and multifamily housing mortgage insurance programs were
significantly higher than the income received from the premium
charges of 1/2 percent. The study covered 10 of the 23
active mortgage insurance programs included in the General
Insurance Fund in June 1967--these 10 programs were part of
the 25 active programs in the fund at June 30, 1969. The
study showed the following premium costs which were based on
the limited experience then available for the various programs,
and which suggested the need for close examination of
operations under those specific programs.
Program--applicable section of Approximate premium
National Housing Act cost (note a)
Home:
213 Cooperative sales 1.3%
221 Moderate income 1.3
222 Servicemen 1.0
Multifamily:
207 Basic rental 1.0
213 Cooperative management and sales (note b) 0.7
220 Urban renewal. 1.1
221 Moderate income (market rate) 8.9
231 Elderly 6.2
232 Nursing homes 1.7
810 Armed services (impacted areas) 8.8
aunder the National Housing Act, the maximum premium rate for the section
222 program cannot exceed 1 percent; however, the act does not
provide for a maximum premium rate for the other nine programs.
bIncludes management-type projects insured under the Cooperative Management
Housing Insurance Fund.
,ENCLOSURE II
Page 6
Although the premium requirements for the section 207
multifamily mortgage insurance program (1 percent) and the
section 203 home insurance program (a maximum of 3/4 percent)
were based on a longer period of experience than the premium
requirements for the other HUD programs, the study showed that
it wou4ldbeery dif fj~cultt o conclude that most of the new,
innovative, high-risk programs would not continue to have
higher premium requirements than the section 207 and 203 programs.
Premium requirements for the section 203 program are
discussed under the Mutual Mortgage Insurance Fund. (See
p. 8.)
The study suggested the following possible courses of
action.
"1. Raise all [HUD] annual premium rates to the
levels actuarial calculations show to be required.
This approach would make [HUD's] normal
programs less competitive with conventional
financing. It would be particularly damaging
to [HUD's] high priority, social purpose programs,
because it would increase the cost of
the programs for those least able to afford
them.
"2. Adjust [HUDI premiums to the required rate for
the "economic soundness" programs (203 and 207)
and seek appropriations to cover losses on the
high priority, social purpose programs. This
latter approach has already been taken, by inference,
with the 221(d)(3) BMIR program. This
is the approach which has always been taken in
the VA program. Perhaps the time has come to
accept the fact that the pioneering missions
which [HUD] is being asked to undertake today
cannot be covered through a reasonable insurance
premium."
The study also recognized that other courses of action might
be possible, such as tightening program requirements.
In summarizing the results of the HUD study in hearings
in July 1967 before your Subcommittee on Housing and Urban
ENCLOSURE II
Page 7
Affairs on the proposed housing legislation for 1967, the
then-Commissioner of the Federal Housing Administration
stated that HUD did not believe that the premiums and fees
charged in many of the high-risk programs were adequate to
cover possible losses. The Commissioner stated, however,
that it was HUD's position that the Congress had established
high-risk programs'to meet special social purposes and that
HUD was administering these programs in that fashion, recognizing
that losses would perhaps exceed revenue in many of
the programs. We were informed by a HUD official that a copy
of the HUD study was not furnished to your Subcommittee.
As a result of the Subcommittee hearings, your Committee
reported out a bill (S. 2700, 90th Cong.), providing for the
establishment of home mortgage insurance programs for lowand
moderate-income families, which would be serviced by a
separate insurance fund. The bill provided that, in view of
the social purpose of the programs, the fund could receive
appropriations to supplement the income received by the fund.
Although the bill was not enacted, similar provisions were
included in the Housing and Urban Development Act of 1968
(12 U.S.C. 1707-1715y) and the Special Risk Insurance Fund
was established. (See p. 3.) This act did not provide for
the transfer to the Special Risk Insurance Fund those highrisk
social-purpose programs insured under the General Insurance
Fund.
Public Law 90-301, enacted May 7, 1968, authorized the
establishment of a Commission to study mortgage interest
rates and to make recommendations toward ensuring the availability
of an adequate supply of mortgage credit at a reasonable
cost to the consumer. In an August 1969 report to the
President and to the Congress, the Commission stated, with
respect to the actuarial determinations made by HUD,,_that
some reduction in the premiums might be possible by adopting
a more reali$stic-calculation of risks. The Commission report
pointed out that HUD's estimates of the insurance reserve requirements
were based on the losses that might occur in the
eventtff=oamajor economic depression. The Commission report
stated that this basis seemed overly conservative in view of
the changed economic environment prevailing now in comparison
with that of the 1930's when some of the HUD insurance programs
were established. HUD officials informed us that its
ENCLOSURE II
Page 8
actuarial calculations of reserve requirements did indicate
what would be required to meet serious recession ondtionsT '
but that these conditions were substantially less severe than
the depression of the 1930's.
As of June 30, 1969, losses of $~U1mlion incurred by
24 of the 34 programs served by the fund were covered by the
$506 million in insurance reserves accumulathe-d-e other
10 programs. HUD had not determined whether the future income
from outstanding insured mortgage loans would be sufficient
to meet future expenses and losses and to liquidate the
existing losses.
Mutual Mortgage Insurance Fund
The Mutual Mortgage Insurance Fund, established to underwrite
the home mortgage program authorized by section 203 of
the National Housing Act, had a reserve balance of about
$1,176 million as of June 30, 1969. The insurance reserves
needed to maintain the fund on an actuarially sound basis were
estimated by HUD at about $1,368 million. The deficiency of
$192 million was attributable by HUD, in part, to the insurance
of new mortgages with higher loan-to-value ratios (higher
risk mortgages) and longer maturities.
Since the establishment of the section 203 program in 1934,
the loan-to-value ratios and maximum amounts for insured mortgages
have been significantly increased. In 1934, HUD could
insure a 20-year mortgage on a single-family home at 80 percent
of its appraised value. The maximum permissible mortgage
was $16,000. Pursuant to the Housing and Urban Development
Act of 1969 (12 U.S.C. 1720), HUD can generally insure a
single-family home mortgage based on loan-to-value ratios of
97 percent of the first $15,000 of appraised value, 90 percent
of the value in excess of $15,000 but not in excess of
$25,000, and 80 percent of the value in excess of $25,000.
The mortgage term is generally 30 years and the maximum permissible
mortgage is $33,000. The following table shows the
median loan-to-value ratios for new and existing singlefamily
homes insured by HUD under section 203 for selected
years.
ENCLOSURE II
Page 9
Median loan-to-value ratio
Year New homes Existing homes
1950 88.0% 77.8%
1952 83.7 77.9
1954 85.3 78.5
1956 86.6 82.9
1958 91.5 90.2
1960 93.5 92.6
1962 94.4 94.4
1964 94.5 94.8
1966 95.0 95.2
1968 94.4 95.2
1969 93.7 95.1
The successive increases in the loan-to-value ratio facilitated
homeownership by reducing the amount of the downpayment
by the mortgagor; however, they increased HUD's insurance
risk. HUD charges an insurance premium of 1/2 percent
on all home mortgages insured under the Mutual Mortgage
Insurance Fund, regardless of the loan-to-value ratio and
related risk.
Several studies have indicated that as the loan-to-value
ratio or the term of amortgage increases, a greater percentage
of mortgages are defaulted. For example, the HUD study in
1967 showed that, on the basis of the 1957-65 experience, the
rate of default substantially increased as the loan-to-value
ratio and mortgage term increased. This is shown in the
following table.
Defaults as a percent
of insurance written.
Term o'f mortgage
Loan-to-value ratio 20 years 25 years 30 years
86 to 89% 3% 5% 7%
90 to 92 5 7 9
93 to 95 9 11 13
96 to 97 15 19 23
ENCLOSURE II
Page 10
Also, a 1969 study of default risk on HUD-insured home
mortgages made by Mr. George M. von Furstenberg, assistant
professor of economics at Cornell University, showed that, as
the loan-to-value ratio increased from 90 to 97 percent, the
default rate increased significantly. Mr. von Furstenberg
concluded that any group ofI-mortgagorsr--eceiving insurance ona
disproportionately large numb-er--6f low-downpayment (high
loan-to-value ratio) loans would benefit from premiums paid
by mortgagors who receive insurance on lower risk loans when
one premium rate was used for all insured mortgages and the
insurance program was actuarially sound.
HUD's 1967 study of premium costs showed that the premium
of 1/2 percent was insufficient to achieve the actuarial soundness
of the Mutual Mortgage Insurance Fund because of the
greater number of mortgages being insured with high loan-tovalue
ratios. The HUD study concluded that the actuarial
soundness of the fund could be maintained if, instead of one
premium rate for all home mortgages, a variable premium basis
was established which provided for premiums of (1) 1/4 percent
for insured mortgages with loan-to-value ratios of less than
90 percent, (2) 1/2 percent for insured mortgages with loanto-
value ratios of 90 to 93 percent, and (3) 3/4 percent for
insured mortgages with loan-to-value ratios of 94 percent or
more.
We estimated that, if the above variable premium rates
had been applied to the 324,000 home mortgages insured in 1969
under section 203(b) of the National Housing Act, 61,.000
(19 percent) would have been assessed a premium of 1/4 percent.,
79,000 (24 percent) a premium of 1/2 percent, and 184,000
(57 percent) a premium of 3/4 percent.
ENCLOSURE II
Page 11
Matters for the consideration of the Committee
The General Insurance Fund reserve deficiency increased
during the past 6 years from $25 million to $301 million (or
7 percent of the reserve balance to 154 percent) because of
a decrease of $167 million in the insurance reserve balance
and an increase of,$109 million in estimated insurance reserve
requirements. HUD's 1967 study of premium costs for
10 of the 34 programs (25 active and 9 inactive) presently
included in the General Insurance Fund indicated costs at that
date which were substantially higher than existing premium
rates. No action has been taken by HUD to increase any of
these premium rates.
In view of the fact that the HUD study included only 10
of the 25 active programs in the fund as of June 1969 and in
view of the continued depletion of the fund's reserve balance,
we believe that the Committee may wish to have HUD mak&a___current
appraisal of the pramiunL rateees odrefo uture inurance
activitgygenerated under all active programs in order
that actuarial soundres in the Genea Insurance Fund may
be achieved.
Because studies have shown that the risk of default on
insured mortgages varies with the loan-to-value ratio and
term of the mortgage loan for home mortgage loans, the Committee
may wish to direct HUD to establish a variable system
of premiums for home mortgage loans similar to that suggested
by HUD's 1967 study of premium requirements for the section
203 home mortgage program.
In 1969, the Commission on Mortgage Interest Rates questioned
whether HUD's reserve requirements were established on
an overly conservative basis. In view of this, the Committee
may wish also to have HUD review, in conjunction with its
study of premium requirements, 'the reasonableness of the basis
used to determine the reserve requirements of the General Insurance
Fund and the Mutual Mortgage Insurance Fund and the
individual mortgage and loan programs served by these funds.
ENCLOSURE II
Page 12
Proposed housing legislation for 1970
Senate bill 3639 of the ninety-first Congress proposes
to establish eight mortgage and loan insurance programs,replacing
the various programs presently authorized by the
National Housing Act, which would be serviced by either the
General Insurance Fund or the Special Risk Insurance Fund,
depending on whether the mortgage or loan is an insurable
risk or a special risk. Mortgages involving Federal subsidies
would be classified as special risks and would be insured
under the Special Risk Insurance Fund.
The Secretary of HUD would have authority to establish
premiums, at such rates as he determines necessary, for mortgages
and loans to be insured under the proposed programs.
HUD envisions that premiums for the proposed insurance programs
to be serviced by the General Insurance Fund would be
established on an actuarially sound basis; however, these
programs would provide for insuring mortgages similar to those
insured under the 10 programs which were the subject of HUD's
1967 study. HUD's study showed that these 10 programs had
higher premium costs than the established premium rate of
1/2 percent.
The proposed legislation also would permit generally
higher loan-to-value ratios for insured home mortgages than
those currently permitted by the National Housing Act.
We believe that, if premiums for mortgages insured under
the proposed legislation are to be established on an actuarially
sound basis, steps along the lines of our suggestions
discussed above, concerning (1) a current appraisal of premium
rates, (2) consideration of a variable system of premiums,
and (3) a review of the basis for determining reserve
requirements, are essential to provide a proper basis for any
appropriate changes.
HUD envisions that the premiums for those insurance programs
which would be established by the proposed legislation
and insured under the General Insurance Fund would be fixed
on an actuarially sound basis. Because these proposed programs
would be included in the General Insurance Fund, which
at June 30, 1969, had an estimated reserve deficiency of $301.
million, the Committee may wish to consider whether the
ENCLOSURE II
Page 13
premiums for mortgages insured under the proposed programs
would provide sufficient income to eliminate the existing
reserve deficiency in the General Insurance Fund.
Under the proposed legislation, the Mutual Mortgage Insurance
Fund and the Cooperative Management Housing Insurance
Fund would continue to serve mortgage loans previously insured
pursuant to sections 203 and 213 of the National Housing Act;
however, no new mortgage loans would be insured under these
two funds. Mortgage loans similar to those previously insured
under these two funds would be included in the insurable
risk programs and insured under the General Insurance Fund.
The proposed legislation would not provide for the distribution
of dividends from the General Insurance Fund for these
new mortgage loans as is provided for mortgage loans insured
under the Mutual Mortgage Insurance Fund and the Cooperative
Management Housing Insurance Fund.
Because mortgage loans similar to those previously insured
under the Mutual Mortgage Insurance Fund and the Cooperative
Management Housing Insurance Fund, would not be entitled
to dividend distributions under the proposed legislation,
the Committee may wish to consider the inclusion of a
provision in proposed legislation whi'c-hwpuDh' proyideeither
fpheayment o 'dividends on mortgage loans similar
to-thde' insurddunder the Mutual Mortgage Insurance Fund and
the Cooperative Management Housing Insurance Fund or for the
elimipation of dividend payments relating to mortgages insured
under-these two funds at the present tim. The Departmennt
-favorfs inclusion of a provision in the proposed legislation
which would provide for dividend distributions.
ENCLOSURE III
Page 1
GENERAL ACCOUNTING OFFICE
COMMENTS ON SELECTED ELIGIBILITY REQUIREMENTS
FOR ADMITTANCE TO FEDERALLY SUBSIDIZED HOUSING
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
INTRODUCTION
Our survey covered eligibility requirements for admittance
to the following major subsidized housing programs administered
by the Department of Housing and Urban Development.
The first two programs were authorized by the United
States Housing Act of 1937, as amended; the third program,
by the Housing and Urban Development Act of 1965; and the
last three by the National Housing Act of 1934, as amended.
!1. Low-rent public housing.
2. Section 23 leased housing.
3. Rent supplement housing.
4. Section 221(d)(3) below-market-interest-rate (BMIR)
rental housing assistance.
5. Section 235 homeownership assistance.
L 6. Section 236 rental housing assistance.
Eligibility requirements have been established for each program
either by law, by HUD administrative regulation, or by
local housing authorities.
DETERMINATION OF QUALIFYING INCOME
Criteria for determining the amount of qualifying income
for federally subsidized housing programs serving low- and
moderate-income persons vary significantly between locations
and programs. As a result, certain inequities exist for program
applicants living in the same general area as to eligibility
and housing opportunities under the various programs.
ENCLOSURE III
Page 2
Also, the administration of the programs is made more difficult.
Income limits for low-rent public housing and leased
housing are established by local housing authorities on the
basis of various factors considered by them to have an effect
on the rent-paying'ability of a family. Consequently, housing
authorities could, and often do, have significantly different
income limits for these programs. Income limits for
leased housing are generally the same as for conventional
public housing, but they can be higher under certain circumstances.
For the rent supplement program, income limits established
by HUD are required by law to be no higher than those
of the public housing program in the community but they can
be lower. For the section 221(d)(3) BMIR program, HUD has
generally tied income limits to the cost of walk-up apartment
construction (not to exceed the median income in the area in
which the housing project assisted under the program is to be
built). Such limits are therefore not dependent on public
housing limits. The incomes of applicants under the section
235 and section 236 programs cannot exceed the "regular
limit" of 135 percent of the public housing limit in the area
or the "exception limit" of 90 percent of the section
221(d)(3) BMIR limit which HUD can apply in certain cases.
Under existing procedures, low-income families in the
same general area could be eligible for admittance to federally
subsidized housing in one community and not in another,
or they could be eligible for one program and not for another
in the same community. In four communities within 15 miles
of each other in the Washington, D.C., metropolitan area, the
following income limits were in effect at the time of our review
for a family of four under the six major subsidized
housing programs.
ENCLOSURE III
Page 3
Qualifying annual income limits (family of four)
Low-rent Section 23 Rent Section 235 Section 236
public leased supplement home rental Section 221(d)(3)
Community housing housing housing ownership housing BMIR housing
A $4,800 $5,400 $4,800 $6,480 $6,480 $8,850
B 5,100 5,100 5,100 6,885 6,885 8,850
C 4,700 4,700 4,700 6,345 6,345 8,850
D 4,800 4,800 4,800 6,480 6,480 8,850
The inequities generated by the different income limits
are compounded by the fact that income is defined or arrived
at differently from program to program and from community to
community.
In determining whether a family's income is within the
qualifying limits established for all federally subsidized
housing, certain exemptions and deductions are required by
law or administrative regulation to be made from the family's
gross income. These include such items as (1) exemptions
for minor children, (2) deductions for income of minor
children, (3) deductions for income of adults other than the
principal wage earner, and (4) deductions for amounts paid
for the care of children to permit employment of family members.
The following table shows the major deductions and exemptions
allowed at the time of our review under the low-rent
public housing and leased housing programs by the previously
mentioned four communities in the Washington, D.C., area.
Major deductions or exemptions from gross annual family income
Maximum deduction for
earned income of each Maximum deduction Exemption
adult other than the for income of for each
Community principal wage earner each minor minor Other
A $1,000 $1,000 $100 10 percent of
earned income
B - - - Cost of care
for dependent
children
C 1,000 1,000 100 Cost of care
for dependent
children
D ---$ 600 per person ---- 10 percent of
---$1,200 " family------ gross income
ENCLOSURE III
Page 4
Under the other federally subsidized housing programs
covered during our survey (rent supplement, BMIR, section:235
and section 236), there is no provision either by law or by
regulation for granting a deduction for the income of adults YA"',t
other than the principal wage earner. In the case of minors' o
income, however, all (such income) is deducted from the total
family income in computing qualifying income under these programs.
Under the rent supplement program and the section 235
and section 236 programs, the law allows a $300 exemption per
year for each minor in computing qualifying income.- No exemption
for minors is provided under the BMIR program.
We examined into the eligibility requirements for lowrent
public housing for six major cities. At the time of our
review, HUD records showed that, in five of the six cities
local housing authorities, in computing qualifying income,
allowed deductions for income of adults other than the principal
wage earner. In the sixth city, such deductions were
not allowed. In four of the six cities, deductions were allowed
for income of minor children; in the other two, such
deductions were not allowed. Moreover, the amounts of deductions
for income of both adults and minor children and the
conditions under which they were granted varied significantly
among the cities. For example, in the four cities that allowed
deductions for income of minor children, the amount
ranged from $85 a month per minor and a maximum of $255 per
family to all of such income if the minor was a student.
Only two of the six cities allowed an exemption for miors
in computing qualifying income for the public housing or
leased housing programs. In both cases, the exemption was
$100 a year per minor.
Matters for consideration of the Committee
In view of the inequities that tesult because of the
significant variances for establishing qualifying income under
the various federally subsidized housing programs, we believe
that a need exists for definitive criteria and procedures
for establishing income limits and deductions to be
used in determining the eligibility of applicants for such
programs. We recognize that income limits should vary across
the nation in accordance with economic conditions in each
ENCLOSURE III
Page 5
area, but we believe that the basis for and method of establishing
qualifying income should be standardized. The Committee
may wish to require that the method of determining a
family's /eligibility for housing assistance be standardized
for all federally subsidized housing programs.
The proposed housing legislation for 1970 (S. 3639)
would establish the median income in the area in which the
subsidized housing is located as the basis for determining
income limits for all federally subsidized housing programs.
In addition, for purposes of determining the eligibility of
program applicants, the proposed legislation would uniformly
define income as including the income of all family members
from all sources, except that nonrecurring income and the
earnings of minors could be excluded, as determined by the
Secretary of Housing and Urban Development. The Committee
may wish to specify what percentage of the median income
amount computed for an area would constitute the maximum income
limits for federally subsidized housing programs in that
area,
HUD officials have testified that local housing authorities
would continue to establish income limits for the conventional
public housing and leased housing programs, the
only restriction being that such limits could not exceed median
income in the area, as provided in the proposed legislation,
In view of the above testimony by HUD officials, the
Committee may wish to require that income limits for conventional
public housing and leased housing be determined on the
same uniform basis as that contemplated for all other subsidized
housing programs to be authorized by the proposed legislation.
ENCLOSURE III
Page 6
ASSET LIMITATIONS
At some locations and under certain programs, the amount
of an applicant's assets is considered in determining his
eligibility for admittance to federally subsidized housing.
At other locations and under other programs, asset holdings
are not considered at all.
According to HUD regulations, asset limitations are mandatory
requirements only for the rent supplement program and
the section 235 homeownership assistance program. The limitations
for the rent supplement program are $5,000 for lowincome
elderly and $2,000 for low-income nonelderly applicants.
For section 235 housing, these limits are increased by $500
for each dependent plus an amount equal to the applicant's
share of the mortgage payment for 1 year. HUD has encouraged
local housing authorities to consider applicants' asset holdings
in determining their eligibility for federally assisted
housing under the conventional low-rent public housing program
and the leased housing program; however, asset limitations
have not always been established. There is no legal or
administrative requirement that asset holdings be considered
in determining tenant eligibility under the rental housing
programs authorized by section 221(d)(3) and section 236.
In the four Washington, D.C., area communities discussed
in the preceding section (see p. 2), the local housing authorities
had established asset limitations for admittance to public
housing ranging from $750 to $12,900. Two of the authorities
had different limitations for elderly and nonelderly
applicants; the other two authorities each had a single limitation
for all applicants.
Widely varying asset limitations had been established
for public housing applicants in the six major cities discussed
in the preceding section. (See p. 4.) Separate asset
limitations for elderly and nonelderly applicants had been established
in one of the six cities; the other five each had a
single limitation.
In our report to the Congress on the Administration of
the Leased-Housing Program (B-118718, February 4, 1970), we
ENCLOSURE III
Page 7
stated'that nine of the 11 local housing authorities included
in our review had established asset limitations for the leased
housing program. (Asset limitations for leased housing were
generally the same as those applicable to the conventional lowrent
public housing program.) The limitations ranged from
$3,000 to $15,000 for elderly applicants and from $3,000 to
$9,000 for nonelderly applicants.
One of the two authorities that did not have asset limitations
had accepted two elderly tenants who, according to the
authority's records, had savings of about $33,500 and $24,000.
In contrast, an authority located only a few miles away had
an eligibility policy that disqualified any applicant having
assets in excess of $3,000, except in unusual cases upon the
special approval of the authority's board of commissioners.
Matters for consideration of the Committee
In view of the widely varying restrictions on asset holdings,
the Committee may wish to consider whether asset limitations
should be established for determining the eligibility
of applicants for all federally assisted housing and whether
such limitations should be uniform, nationwide, for all federally
subsidized housing programs or whether they should be
uniform within the various programs depending on the income
levels to be served.
The proposed Housing and Urban Development Act of 1970
contains no provision for establishing limitations on asset
holdings of persons in the determination of their eligibility
for federally subsidized housing programs. The Committee may
wish to consider whether such a provision should be included
for the federally assisted housing programs being proposed.