The use of the "as-is" sales program has increased rapidly during the past year. It represented only 5% of sales during 1973. By the second quarter of 1974, it represented 25% of sales and HUD apparently was urging area offices to sell at least 50% of their properties "as-is." Among other things, this means that the largest source of rehabilitated homes in Oakland is engaged in at least a partial withdrawal from the field of rehabilitation and rehabilitation lending.

Previously, HUD has been advancing the cost of the rehab out of their own funds and then providing mortgage insurance on the take-out loan to the buyer. It is highly questionable whether a speed-up in sales is worth trading for HUD's role in providing construction funding for rehabilitation and takeout financing for repossessed properties.

HUD's attempt to sell a substantial portion of their inventory without warranty and without loan guarantee can hardly fail to have an adverse influence on the marketability of all properties in East Oakland. Indeed, the practice appears to be a rather blatant form of red lining by HUD, itself. Such limited funds as the local community has available could be better spent on the properties that are not HUD-owned, while looking to HUD to take care of the properties that have become a problem through the operation of HUD programs. Oakland is not the only community that has expressed reservations about the "as-is" sales program, as is evident from the two attached news articles.

Jim Price's memo to the City Council Civic Action Committee (see copy attached) sets forth some interesting statistics. One of the reasons advanced for supporting the "as-is" sales program is that it will reduce the time that properties remain vacant.

The "critical path of a defaulted home" that is part of Price's memo shows a total time of 16 months from default to close of sale to a new buyer. HUD does not gain title until the end of the eighth month. Six months are allowed for the rehab process and two months for a sale. The times set forth are averages; in individual instances, the process may be shorter or longer.

Obviously, the only period that is subject to shortening by the "as-is" program is the 8 months following acquisition by HUD. Whether this period would be shorter if proper safeguards are imposed on the "as-is" programs is open to question. Whether HUD itself could shorten the period through tighter administration of the program, given adequate funds and personnel, is also open to question.

The six month period between HUD's acquisition and sale of the property is taken up by turning the property over to a management broker who obtains a code letter, a termite report and prepares specifications for repairs and makes a cost estimate and an appraisal to determine the recommended sale price after repairs. HUD then puts the work out to bid, selects a contractor and has the work completed. The final two months are required to close the sale. A private purchaser would be faced with the same process the assumption that it would get done more rapidly needs demonstrating at least to people who have been involved in enforcing the obligations of redevelopers to complete projects within projected time schedules.

The question is not necessarily one of efficiency. The private profit-motivated operator or owner who intends to rehab for his own use may have compelling reasons for delay, such as anticipated fluctuation in the money market, trouble with contractor or sub-contractor, or trouble obtaining needed materials, and finally, trouble finding a willing purchaser who can qualify for whatever financing he may have available.

It has been suggested that the "as-is" purchaser could be required to post a bond guaranteeing completion. Such a requirement might well be effective in many cases of insuring timely completion. However, it would not guarantee that the property would be sold and occupied. In those cases where the bonding company had to complete the work the element of time saving would certainly be last. Getting a bonding company to complete a job is not an easy or quick process. A bonding requirement would eliminate many small contractors who could not qualify for a bond. Minority contractors particularly have experienced great difficulty in obtaining bonding.

Declaring a property sub-standard prior to sale would give the City the necessary authority to enforce completion before occupancy, but it would not guarantee timely completion and where enforcement was necessary, another time-consuming legal process would be involved.

"As-is" property sales to the City or to non-profit organizations under carefully controlled conditions may have some merit.

At a minimum the City should ask HUD to make "as-is" sales only with the consent and involvement of the City in the process and then only on the condition that HUD make construction and take-out financing guarantees available to each purchaser.

Mr. Price's memo shows that HUD typically experiences a loss of $6,723 in selling property. If the City gets involved in purchasing HUD properties it should make sure that this loss situation is not transferred to the City. Congress established the FHA programs and HUD has operated them. The law provides an insurance fund to take care of defaults. It is not reasonable to expect already overburdened cities to pick up the tab for programs that have come to grief through circumstances outside the control of the City. Such an end result could not even fit within Mr. Moynihan's phrase "benign neglect." It would have to be called malignant neglect.

AGENCIES

Cities, Community Groups Wary of HUD's As-Is Disposition Program

HUD's "as-is" property disposition program, under which abandoned, HUDFHA-held properties are sold without rehabilitation to both investors and owner occupants, has recently come under heavy fire from both city governments and community groups.

The complaints range from accusations of federal insensitivity to the larger social cost of unloading the homes indiscriminately to the highest bidder, to charges that HUD is luring unsuspecting homebuyers into a deal from which they will never be able to recover.

Among the suggestions put forward by critics is one that no title be forwarded to a buyer until the property is certified as meeting code standards. Another is putting a warning on all contracts which advises buyers of the enormous costs they may have to bear in rehabilitating the homes.

“Completely Inappropriate”

Andrew Olins, housing aide to Boston's Mayor Kevin White, is one of the program's most bitter opponents. "This policy is completely inappropriate," he told HDR recently. "It may save HUD's bacon, but it'll ruin us.”

He argues that HUD's desire to get the homes out of the federal inventory at any cost makes sense from a management point of view, but not as policy. Although the homes cost HUD millions every year to maintain-$86,000 per month for 700 buildings in one neighborhood of New York alone Olins says that the eventual cost to the city could be many times greater.

One reason for this is HUD's policy of denying FHA insurance of any type to homes bought by individuals. Unsuspecting buyers, Olins says, will put down the cash payment needed to get the house and then find out that they cannot secure financing to rehabilitate it. The next step would probably be abandonment, he claims, and then the city, not the federal government, would be facing the same dilemma.

"The whole fundamental problem in the as-is and homesteading programs," Olins concluded, "is the lack of financing-its deception and absolute fraud.” Very similar concerns were voiced in a recent letter from a New York community group to HUD Secretary James T. Lynn and Regional Administrator S. William Green. The July 29 letter to Lynn from the Association of Neighborhood Housing Developers demand an "immediate cessation" of the as-is program in New York. The group, which spoke for 7 neighborhood development groups, says that it supports the concept of homeownership for lower-income families, but is "appalled at the procedures by which HUD" is selling the homes. Too often, the letter continues, "unsuspecting low income purchasers" will have "neither the means nor access to necessary professional, technical and financial assistance required to restore these homes o livable condition."

In a telephone interview with HDR, Robert Schur, the group's president, estimated that the average cost of buying and rehabilitating a HUD-owned onefamily home is between $13,000 and $24,000. For a two-family house, the cost jumps to about $30,000.

With such high costs, and HUD's policy of denying insurance to owner-occupants, Schur predicted two possible scenarios. On the one hand, owner occupants will buy the homes, not knowing what's in store. They'll see the bills start to mount up, and they'll seek financing. Without insurance, no lender in the area will be willing to make the investment. Typically, Schur said, the final step is abandonment. In these cases, this could be accompanied by financial ruination

of unsuspecting buyers who sank their meager life savings into what they thought was a good investment.

If such buyers are cautious and stay away, the result may still be the same, Schur continued. Then speculators could pick up the properties at HUD's rockbottom prices. Unscrupulous ones could do minor, cosmetic rehab work, sell the homes to the same poor families, and secure them mortgages with HUD-FHA insurance, since HUD has said it will insure homes bought this way. Says Schur, "we've been this route before. It's the reason why the houses are abandoned in the first place."

Instead of "wholesaling" the houses, Schur advocates a measured and coordinated HUD policy for unloading the homes and assisting the buyers and neighborhoods into the bargain.

Representatives of the group will be meeting on August 19 with Green to discuss these issues.

Code Certification

One way to short-circuit the gloomy process outlined by Schur was offered by Ron J. Hewitt, Acting Director of Detroit's Community and Economic Development Department. With the nation's largest single inventory of HUDowned, abandoned homes, Detroit is also nervous about HUD's disposition plans. He said that the city had suggested to HUD that it hold back title to the properties until Detroit inspectors could certify that code violations had been met. "This would give us some control over what's being sold," he expained.

Such an arrangement was in effect for several months, according to Hewitt, but the FHA sent out a circular rescinding it in May. He said the agency justified the move on the grounds that "it's not done anywhere else." Subsequent discussions with the FHA, Hewitt stated, have not been productive. As a result, the city council has asked the buildings department to draft an ordinance which would require HUD to follow this course.

Without such a qualification, Hewitt added, "I can't think of a single group in this city that's in favor of the as-is plan."

HUD Confidence

Officials at HUD responded to these criticisms by expressing a basic confidence in the as-is disposition concept, while acknowledging that there may be some problems to work out in its actual administration. William K. Cameron, Director of the Office of Property Disposition at HUD Central, told HDR that field personnel are currently examining recent sales to see what the problems are. A study is being prepared, he said, in order to provide the basis for new regulations to govern the program. He hoped they would be ready "soon."

Cameron added that as-is sales are presently accounting for about 30 percent of HUD's overall monthly sales figures. In recent months, this overall figure has topped 5,000 properties.

In New York, where the issue has been joined more forcefully than elsewhere, S. William Green, Regional Administrator for Region II, told HDR that he is confident that the sales materials provided to prospective buyers "make it very clear" that substantial amounts of money, secured by loans not eligible for federal insurance, will be needed to bring the houses up to code.

Cameron also said that HUD had specifically instructed its field offices to make it "very clear" to prospective buyers that they will be facing costs far above that of the purchase price, and will not be eligible for federal insurance. "I have to assume," added Green, "that any person who can walk into the office and put down a couple of thousand dollars is capable of making responsible decisions."

He said that the average price of an as-is home has been around $3,000 in New York.

Speaking to the question of speculators, he asserted that the lack of rehabilitation loan insurance in the first instance and the lack of any guarantee of FHA mortgage insurance later would keep the shady operators out of the business. He added that the FHA scandals of the past had stemmed largely from a lack of adequate inspection by FHA appraisers when insurance was involved. "That won't happen again," he stated.

HUD CONSIDERING FUNDING PRIORITIES IN PUBLIC HOUSING MODERNIZATON

A forthcoming revision to HUD's public housing modernization handbook may include guidelines for setting priorities in the use of limited federal moderniza

tion funds. This would be a change from present practice, which allows local housing authorities latitude in deciding where the funds will be utilized.

Other changes being considered in the revised handbook include some technical amendments to simplify processing, and provisions for tighter HUD monitoring of fund utilization. C. Wayne Hunter, acting chief of the publicly financed housing programs branch of HUD's Office of Housing Management, told HDR that all of the changes are only in the discussion stage at this point, however.

"Generic Priorities"

Hunter explained that the agency is considering advancing certain "generic priorities" for the use of modernization funds. Especially in times of rising costs. Hunter said, it is important to answer two questions: how much to spend, and where to spend it. Thus, where funds are limited, HUD might tell local authorities receiving the funds that they should be used primarily for code violations, for example, as opposed to amenities.

The other changes under consideration, according to Hunter, are aimed at expediting funds request processing, and insure "more efficient use" of modernization funds.

Delayed Publication

Although the handbook was originally scheduled for publication in the Federal Register in mid-August, Hunter said that staffing problems had prevented the necessary work from being done. He declined to give a new estimated publication date, nothing only that "it is a very high priority here."

Prior to publication for comment, Hunter said field office personnel would be consulted on the contents of the handbook. He also said that "advisory participation" by FHAS is being considered.

FEW ASSIGNMENTS BECAUSE OF GNMA PASS-THROUGHS, HUD FINDS

HUD's inability to offer forbearance to insured multifamily project owners whose mortgages are backing GNMA securities has not seriously affected the assignment rate among such mortgagors, an ongoing HUD study shows.

These findings diverge from earlier concerns expressed by housing management officials that the mortgage backed securities program's lack of flexibility regarding forbearance would hamper efforts to keep temporarily distressed projects in private hands through so-called "work out agreements." (See HDR Vol. 1, No. 26, B-3; Vol. 2, p. 197 for background reports.)

Under the mortgage backed securities program, GNMA guarantees investors timely "pass-through" payments of principal and interest on their securities. Thus, owners whose property is in the pool are not able to take advantage of HUD forbearance measures without jeopardizing the pass-through. This puts them at a relative disadvantage to other owners of HUD-FHA programs, according to some officials, who pointed out that the guarantee to investors means HUD has to be assigned the mortgage as soon as it defaults, to protect GNMA's stake in the issue.

According to the partially completed report, however, only six of 91 projects put into GNMA's securities pools through the first half of calendar year 1973 have been assigned to HUD because of mortgage defaults. Of course, says William M. Fox, assistant to the director of HUD's office of loan management and author of the study, only one could have been helped by forbearance measures. The others have continued in defaulting despite assignment, and increased the amounts by which they are in default. The one exception, a relatively small, $500,000 mortgage, has decreased its default amount sharply since it was assigned, indicating that short-term forbearance might have helped.

In calendar 1974, another 95 projects have been placed in mortgage backed security pools. Two of these, said Fox, went into default and had to be assigned. He warned, however, that it is probably too early to draw reliable conclusions about these 95.

Data from the second half of calendar 1973 are not available, Fox said.

[From McGraw-Hill News, Chicago, Ill.]

If the preliminary opinions of Judge Hubert Will are made effective through a court order, the whole nature of the Federal Housing Administration's subsidized mortgage program could change dramatically. Mortgage bankers and lenders who see themselves as prudent middlemen protecting investment would

have to assume some "handholding" functions with borrowers, and HUD might have to become much more of a policeman in monitoring FHA-subsidized mortgages.

Both HUD and Chicago's mortgage companies are frantically trying to forestall that possibility.

78,000 houses. Judge Will made his charges in a class suit against HUD, its officers, and mortgage bankers and lenders, by Mrs. Johnnie D. Brown, whose FHA mortgage was foreclosed in 1972.

Mrs. Brown, a mother of six who is still living in her $24,200 house, missed one monthly payment to the mortgage company because of a hospital stay, a loss of work and a delay in the delivery of her aid-to-dependent-children check. After notifying the company of the delay, Mrs. Brown made up her late payments and penalties but refused to pay $525 in legal fees. The company filed for default.

In denying a motion to dismiss HUD or its officials from the case the mortgage companies were dismissed-Judge Will blasted the department's handling of the entire mortgage-subsidy program. As of last April, the program had left HUD as the owner of 78,000 foreclosed houses-2,200 of them in Chicago. Another 5,000 foreclosures were then expected.

Warning. The judge pointed out that HUD has become by far the largest owner of abandoned slum buildings in the Chicago area, and he observed:

"If HUD had consciously and deliberately set out to frustrate the Congressional purpose and sabotage the (FHA) program, it could hardly have done so more effectively short of simply refusing to carry it out."

The judge then warned that, if it is proved that HUD did not enforce its guidelines, the HUD policy constitutes "an abuse of discretion in violation of the National Housing Act." This abuse of discretion, he further cautions, is actionable.

Defense. At the hearing, HUD defended its policy of allowing mortgagees to make foreclosure decisions, subject only to HUD's suggested guidelines. But Judge Will said the existence of HUD's guidelines indicates that Congress intended that HUD protect those in "marginal financial circumstances" from being "thrust . . . into the marketplace." He said HUD apparently "believes its commitment is limited to assisting poor families in acquiring a mortgage but that the commitment somehow evaporates thereafter."

The department "has tragically misled thousands of low-income Americans," the judge said, by its failure to deal with "inevitable temporary crises such as illness (and) temporary unemployment."

Delays. The case will now go through months of a legal process called "discovery," during which the plaintiff's attorney will try to prove that HUD did violate its own guidelines.

Mrs. Brown's attorneys have added eight homeowners to the case and will add more. They may also appeal the judge's dismissal of the mortgage companies from the suit.

The case could break new ground, for HUD may be forced to reexamine itsas Judge Will puts it-"preoccupation with its commitment to the mortgagees." The judge upheld HUD's contention that due process was not violated in the foreclosure, but that was a small victory when considered along with the suggestion that HUD must enforce its handbook provisions.

Chicago's HUD officials agree that mortgage companies are foreclosing too quickly in some cases, but these officials argue that there is nothing they can do about it.

John Waner, Chicago's regional administrator for HUD, has been accusing many mortgage companies of mercilessly foreclosing on FHA-subsidized mortgages and of ignoring HUD recommendations to counsel homeowners. Waner says that, in 70,000 to 80,000 foreclosures, "I couldn't find five cases where forbearance was granted."

"If a person shows good faith, for God's sake, we should at least give him that one break," Waner insists. "Somebody has got to care."

Lenders' side. A mortgage banker takes a somewhat different view. "Our basic posture is we make loans to people but the basic obligation to make payment is theirs," says Leonard Biglin, vice president of Great Lakes Mortgage in Chicago. "We have an obligation to be fair to them, and to be reasonable when they have a problem. But we don't have a social-welfare obligation to do everything possible to keep them in the house. We are still a lender and they are a borrower.