Insurance applications before the Federal
Houslng Admlnistratlon (FHA), Department of Housing and Urban Development
(HUD), for two multlfamlly houslng prolects, Fox Ridge and Franklin Parh,
proposed for construction in Baltimore County, Maryland, pursuant to
section 236 of the National Housing Act.
Mr. Pfrommer indicated in his letter that in our review we should
include the following considerations: (1) the extent to which the builder
of the proposed prolects previously had participated in multlfamlly housing
programs admlnlstered by FHA, (2) ownershlp and relocation of a road
involved in the construction of the Fox Ridge prolect, (3) coordlnatlon
of actlons of HUD and the Baltimore County government which resulted In
the Issuance of coTditlona1 commitments to the Julio Brothers to Insure
the moltgage loans for the proposed projects, (4) whether HUD procedures
were followed zn approving the conditional commitments to Insure the
mortgage loans, and 15) the basis for the Act-Lng Asszstant Secretery-
Commissioner's oplnlon that HUD was legally bound to carry through the
conditIonal commitments to Insure mortgage loans for the proposed prop-
&ects. The results of our review and our discussions of these matters
J with responsible agency officials are summarized below.
tbr $ckground
Section 236, which was added to the Natlonal Houslng Act by sectlon
and Urban Development AC t of 1968 (82 Stat. 4981, pror
rental and cooperative houslng for lower income famesection
236 of the act, HUD 1s authorized to Insure
mskgcge loans on multlfamilv houslng proJects and to
the mortgagors, thF!%erest on the mortgage loans In
excess 0 percent and the mortgage insurance premiums. These payments--
--permit a basic monthly r&Cal for each
lower than would be applicable If
Sectlon 236 provides that a
tenant pay either the basic rental or 25 percent of his monthly Income,
whlchever 1s greater. Section 236 provides also that a tenant's rental
payment not exceed the rental which would be applicable If no Federal
B-167367
assistance 1s given, Rental payments collected by mortgagors in excess
of the basic rental charges are required by section 236 to be returned to
HUD for deposit in a revolving fund for the purpose of provldlng future
assistance under the program,
Contractual authorizations of $70 mllllon for interest reduction
payments pursuant to sectlon 236 of the act were provided by the Supplemental
Appropriation Act, 1969 (82 Stat. 11931, and the Second Supplemental
Approprratlons Act, 1969 (83 Stat. 53), approved October 21, 1968,
and July 22, 1969, respectively.
Under current HUD procedures, an application for Insurance of a
mortgage loan on a multlfamlly houslng proJect must be submltted to FHA
and processed through three stages lnvolvlng (1) a study of the progect's
feasibility, (2) issuance of a condltlonal commitment to Insure the mortgage
loan, and (3) Issuance of a firm commitment to Insure the mortgage
loan. Applicants for mortgage insurance may request HUD to Initiate the
processrng of the appllcatlon at any one of the three stages, depending
on the extent to whrch the proJect plans have been developed in relation
to the HUD requirements applicable to that stage and any preceding stages,
On behalf of+h-e-Jullo Brothers, sponsgr and bulw of the proposed
Fox Ridge and Franklin Park projects, the proposed mortgagee? In D$cember
submitted appllcatlons to HUD which requested the issuance of condl-
1 commitments to insure mortgage loans for the Fox Ridge and the
Franklin Park proJects. On July 10, 1969, HUD issued condltlonal commltments
to Insure mortgage loans -,706 _6,300 and $3,626,600 on the Fox
Ridge and Franklin Park projects, respectively. HUD Issued firm commltments
to insure mortgage loans of $1,7g,200 for the Fox Ridge proJect
on October 21, 1969, and of $3,626,600 for the Franklin Park project on
Prevzous partlclpation In mortgage
Insurance programs
In connection with the submlsslon of an application for mortgage
insurance, HUD requires the sponsor to submit a certlflcate of its
previous participation In multlfamlly housing programs admlnlstered by
FHA. HUD Instructions speclflcally state, with respect to completion
of the certificate, that:
-2-
J
B-167637
"**Jr Each prznclple, as defined in the certificate, must
list every FHA insured multifamily or Title X proJect in
which he has been, or is involved, identifying the name,
location, FHA case number, and the nature of his
interest***@ ” (Underscoring supplied,)
Our review of HUD records disclosed no evidence that &he+ullo
Brothers, at the time their applications for mortgage insurance for the
Fox Ridge aan Park projects were submitted&n December 19682
were involved in any insured prolects. We found, however, that eight
other proposed projects of -eke Julio Brothers were being considered by
HUD for mortgage insurance in December 1968. Information regarding
these eight proJects IS shown in the enclosure.
Ownership and relocation of a road involved
m construction of Fox Ridge project
Our review of HUD project records and discussions with offlclals of
HUD and Baltimore County revealed that the road requiring relocation to
enable construction of the Fox Ridge project was owned by&&Julio
Buothers. We were informed by Baltimore insuring office offic-Jals that
@~Julio Brothers planned to relocate the road and that they had entered
into an agreement with Baltimore County whereby ownership and control of
the relocated road was to be transferred to the county upon completion of
the proJect Our review of HUD project records showed that the relocation
cost was Included in the project off-site cost of $71,490 which was used
rn establishing the amount of the mortgage loan to be insured.
The Director of Public Works for Baltimore County informed us in
December 1969 that the existing road would be closed to all traffic
when construction of the relocated road was completed. The Director
stated that construction permits for that portlon of the project which
was to be built on the site of the existing road would be withheld until
the relocation of the road was completed by+Jullo Brothers. The
Director stated also that the relocation was being carried out In accordance
with Baltimore County's master plan.
Coordination with Baltimore County government
HUD project records showed that, in accordance with HUD procedures
for approval of mortgage insurance applications, the Baltimore insuring
-3-
J I
B-167637
offlce ascertained that the land on which the proposed projects were to
be situated was zoned by Baltimore County to permit the construction of
the proposed Fox Ridge and Franklin Park projects. Offlclals of the
insuring offlce Informed us that, because the land had the required
zoning classification, they did not consider it necessary to Inform the
County of the issuance of the condltlonal commitments to Insure the mortgage
loans for the projects. These offlclals polnted out, however, that,
before the County would Issue construction permits to +he-Julio Brothers,
it would require the submission of construction plans for the purpose of
determining whether the streets, water and sewer service, and other community
facilltles were adequate to serve the projects.
Instructions not followed by lnsurlng offlce
In issuing conditional commitments to insure
mortgage loans
HUD procedures provided that a preliminary reservation of funds
for interest reduction payments must be obtained for each proJect before
notlfrcatlon is given a proJect sponsor of the feaslblllty of a proJect
for Insurance under section 236 and before issuance of a condltlonal or
a firm commitment to insure a mortgage loan. This requirement was established
by HUD to ensure that the subsequently approved interest reduction
payments do not exceed the aggregate contractual authority to make interest
reduction payments as authorized In appropriation acts.
On June 27, 1969, HUD changed the above procedures to allow insuring
offlces to issue notifications of the feaslbllity of proJects for lnsurante
wIthout first obtaining reservatrons of funds for interest reduction
payments. This revision, however, required that the notlflcations contain
provisions that the feaslblllty of the prole_cIt s -_ _b_eI 1cs_u bje_c-te --o to- --_fu nd-s IL_b_a
made available forc ----I-nvt-e-.r?e.s?t- - _-r-e--d uction-gadyments. We were Informed by I-IUD
officials that contractual authority of $25-alron provided by the
Supplemental Approprlatlon Act, 1969, for interest reduction payments
had been substantially allocated to various projects and that the revised
procedures were establlshed to permit an orderly processing of mortgage
insurance applications pending passage of the Second Supplemental Appropriations
Act, 1969, which increased by on the contractual
authority to make interest reduction payments. Wyere informed also
that the June 27, 1969, revised procedures were intended to apply only
to the notiflcatlons of proJect feaslbillty.
-4-
S167637
We found, however, that the Baltimore Insuring offlce Issued on
July LO, 1969, condltlonal commitments to insure mortgage loans for the
Fox Rs.dge and Franklin Park proJects, which contarned provlslons that
the commitments were Subject "to the reszxxation of&nds ---1s-b eing - -a-p p_ro_v_e--d
and alloca&d." We were advIsedby an offlclal of the HUD Offlce of
General Counsel that, in accordance with the above provlslon, HUD was
not to complete the processing of the applxcatlons for mortgage
xnsurance until reservations of funds were approved for the prolects.
HUD offxcials informed us that the xnsurlng offxe had misinterpreted
the revised instructions and the condrtlonal commitments should not
have been issued at that trme.
The Second Supplemental Approprlatlons Act, 1969, was passed on
July 22, 1969, and reservations of funds were approved for the two
projects on August 8, 1969.
With respect to the legality of condltlonal commitments, HUD's
General Counsel stated that a condltlonal commitment to Insure a mortgage
loan that did not Include any provision for cancellation, was a
blndlng contract that obligated HUD to issue a firm commitment to
Insure the mortgage loan provided that all the conditions contarned
in the conditional commitment were met by the applicant. In this
regard, we were informed by HUD officials that the Acting Assistant
Secretary-Commrssloner, FHA, forwarded to you on October 1, 1969, a
letter which included cltatlons of law and precedent to support HUD's
legal opinion that a conditlonal commrtment was a valid contract.
We have not obtained formal wrltten comments from HUD offlclals
concerning matters discussed in this report; however, the lnformatlon
contained hereln has been drscussed Informally with HUD offlcxals and
1s based on lnformatlon avarlable In HUD frles or otherwise furnlshed
to US by HUD and Baltimore County officials.